WILSON GREATBATCH TECHNOLOGIES INC
FORM S-1/A (Securities Registration Statement)
Filed 7/3/2000
Address 9645 WEHRLE DRIVE CLARENCE, New York 14031 Telephone 716-759-5600 CIK 0001114483 Industry Electronic Instr. & Controls Sector Technology Fiscal Year 12/31 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 2000
REGISTRATION NO. 333-37554
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 3692 16-1531026 (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation or Industrial Identification Number) Organization) Classification Code Number)
10,000 WEHRLE DRIVE CLARENCE, NEW YORK 14031 (716) 759-6901 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
EDWARD F. VOBORIL PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD WILSON GREATBATCH TECHNOLOGIES, INC. 10,000 WEHRLE DRIVE CLARENCE, NEW YORK 14031 (716) 759-6901 (Name, Address Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
COPIES TO:
STEVEN D. RUBIN, ESQ. STEPHEN E. OLDER, ESQ. WEIL, GOTSHAL & MANGES LLP EDWARD D. SOPHER, ESQ. 700 LOUISIANA, SUITE 1600 AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. HOUSTON, TEXAS 77002 590 MADISON AVENUE (713) 546-5000 NEW YORK, NEW YORK 10022 (212) 872-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434, check the following box. / /
CALCULATION OF REGISTRATION FEE
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS TO BE OFFERING PRICE PER AGGREGATE OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) OFFERING PRICE (2) Common stock, par value $.001 per share shares $ $115,000,000
TITLE OF EACH CLASS AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTRATION FEE Common stock, par value $.001 per share $30,360.00 (3)
(1) Includes shares of common stock that the underwriters may purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o).
(3) The registration fee was paid in connection with the initial filing of this Registration Statement on May 22, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. SUBJECT TO COMPLETION--JULY , 2000
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY U.S. FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. PROSPECTUS , 2000
[LOGO]
WILSON GREATBATCH TECHNOLOGIES
SHARES OF COMMON STOCK
WILSON GREATBATCH TECHNOLOGIES, INC.:
- We are the leading developer and manufacturer of power sources and other components used in implantable medical devices, including wet tantalum capacitors and precision components.
- 10,000 Wehrle Drive Clarence, New York 14031 (716) 759-6901
PROPOSED TRADING SYMBOL AND MARKET:
- GB / New York Stock Exchange
THE OFFERING:
- We are offering shares of our common stock.
- The underwriters have an option to purchase an additional shares of common stock to cover over-allotments.
- This is our initial public offering and no public market currently exists for our shares.
- We anticipate that the initial public offering price for our shares will be between $ and $ per share.
- We plan to use the net proceeds of this offering to repay indebtedness.
- Closing: , 2000.
------Per Share Total ------Public offering price: $ $ Underwriting fees: Proceeds to Wilson Greatbatch Technologies, Inc.: ------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense.
JOINT BOOK-RUNNING MANAGERS
DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY DLJDIRECT INC. [GRAPHICS -PHOTOGRAPHS OF PRODUCTS] TABLE OF CONTENTS
PAGE ------Prospectus Summary...... 1 Risk Factors...... 6 Forward Looking Statements...... 15 Use of Proceeds...... 16 Dividend Policy...... 16 Capitalization...... 17 Dilution...... 18 Selected Consolidated Financial Data... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 21 Business...... 31
PAGE ------Management...... 45 Related Party Transactions...... 52 Principal Stockholders...... 57 Description of Capital Stock...... 59 Shares Eligible for Future Sale...... 61 Underwriting...... 63 Legal Matters...... 66 Experts...... 66 Where You Can Find More Information.... 66 Index to Consolidated Financial Statements...... F-1
i PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING US AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR HISTORICAL
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
WILSON GREATBATCH TECHNOLOGIES, INC.
OUR BUSINESS
We are the leading developer and manufacturer of power sources and other components used in implantable medical devices, including wet tantalum capacitors and precision components. We believe that we are a preferred supplier of power sources and components because we offer the most advanced, most reliable and longest lasting products commercially available for implantable medical devices. Through continuous technological innovation and improvements, we have enabled our customers to continually develop and introduce implantable medical devices that are progressively smaller, longer lasting, more efficient and more functional. Our customers include leading implantable medical device manufacturers such as Guidant, St. Jude Medical and Medtronic, the three largest manufacturers of pacemakers and ICDs, based on revenues. We leverage our core competencies in technology and manufacturing to develop and produce power sources for commercial applications that demand high performance and reliability, including aerospace, oil and gas exploration and oceanographic equipment.
Our history, market leadership and reputation for quality and technological innovation in the implantable medical device industry began with Mr. Wilson Greatbatch, who patented the implantable pacemaker in 1962 and founded our company in 1970. We continue to develop pioneering technology used in implantable medical devices and other demanding commercial applications. As of May 1, 2000, we employed 135 scientists, engineers and technicians. To remain a leader in developing new technology, we also maintain close relationships with a number of research organizations, clinicians and other industry professionals. Since 1970, our company has received 321 patents worldwide, and as of May 1, 2000, we held 137 active patents.
We work closely with our customers to enable them to develop innovative medical devices that utilize our specially designed, proprietary power sources and components. We believe that our proprietary technology, close customer relationships, market leadership and dedication to quality provide us with significant competitive advantages over our competitors and create a barrier to entry for potential market entrants.
STRATEGY
Our objective is to enhance our position as the leading developer and manufacturer of power sources and other components for implantable medical devices. We intend to:
- expand our proprietary technology portfolio through continuous technological innovation and continue to focus our research, development and engineering efforts on pioneering power sources and advanced components for implantable medical devices;
- enhance our position as an integrated component supplier to the implantable medical device industry by broadening our product line to include a more comprehensive range of power sources and components;
- continue to collaborate with our customers to jointly develop new technologies that enable them to develop and market increasingly more effective and technologically innovative products; and
- enter into strategic alliances and make selective acquisitions that complement our core competencies in technology and manufacturing for both implantable medical devices and other demanding commercial applications.
1 IMPLANTABLE MEDICAL DEVICE INDUSTRY
An implantable medical device is an instrument that is surgically inserted into the body to provide diagnosis or therapy. The market for our implantable power sources and components benefits directly from the growth of the implantable medical device industry. The largest and fastest growing segment of the implantable medical device market is cardiac rhythm management, which includes devices such as pacemakers and ICDs. Pacemakers treat bradycardia, a condition that occurs when a patient has an abnormally slow heartbeat, by stimulating the heart with regular electrical pulses. ICDs treat tachycardia, a condition that occurs when a patient has a rapid and irregular heartbeat, by delivering concentrated and timed electrical energy to the heart to restore a normal heart rate.
The use of implantable medical devices has grown as advances in technology have enabled the treatment of a wider range of conditions. As the size of implantable medical devices has become smaller, implantation has become less invasive, making the use of these devices more attractive to patients and surgeons. Emerging applications, such as the treatment of congestive heart failure and atrial fibrillation, a condition associated with an unsynchronized motion of the atrium that produces an irregular heartbeat, increased ease of implantation and the general aging of the population are expected to drive the growth of the implantable medical device industry. Medical Data International, an independent industry publisher, estimates that revenues from pacemakers sold worldwide will increase from $2.6 billion in 1999 to $3.6 billion in 2004, representing a compound annual growth rate of 6.7%. Medical Data International also estimates that revenues from ICDs sold worldwide will increase from $1.5 billion in 1999 to $5.5 billion in 2004, representing a compound annual growth rate of 29.7%. The faster growth predicted for the ICD market is predicated on anticipated new applications for, and greater acceptance of, ICDs.
As the leading developer and manufacturer of power sources and other components for implantable medical devices, we believe that our company will continue to be well positioned to meet the requirements of manufacturers of these products.
PRODUCTS
We currently manufacture and market 26 models of pacemaker batteries and 15 models of ICD batteries as well as numerous other components for our customers in the implantable medical device industry. Our commercial power sources are used in aerospace, oil and gas exploration and oceanographic equipment. The following table provides information about our principal products:
PRODUCT DESCRIPTION USED IN ------MEDICAL: Implantable power sources Batteries for implantable medical Pacemakers, ICDs, left ventricular devices assist devices, neurostimulators, drug pumps and hearing assist devices
Capacitors Store energy generated by a ICDs battery before delivery to the heart Medical components:
Feedthroughs Allow electrical signals to be Pacemakers, ICDs, left ventricular brought from inside an implantable assist devices, neurostimulators, drug medical device to an electrode pumps and hearing assist devices
Electrodes Deliver electrical signal from the Pacemakers and ICDs feedthrough to a body part undergoing stimulation
Precision components Machined and molded parts for Pacemakers, ICDs and drug pumps implantable medical devices
COMMERCIAL:
Commercial power sources Batteries for demanding commercial Aerospace, oil and gas exploration and applications oceanographic equipment
2 THE OFFERING
Common stock offered...... shares Common stock to be outstanding after this offering...... shares Use of proceeds...... Repayment of indebtedness, including all of our 13% senior subordinated notes and a portion of our Term A and Term B loans Proposed NYSE symbol...... GB
The outstanding share information is based on our shares outstanding as of May 1, 2000. This information excludes 967,028 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $5.34 per share and an aggregate of 1,818,592 shares of common stock that were available for future issuance under our stock option plans as of May 1, 2000. Unless otherwise indicated, the information in this prospectus assumes no exercise of the underwriters' over-allotment option to purchase additional shares of our common stock and all common stock figures reflect a one-for-three reverse stock split that occurred in May 2000.
Our facilities are located in greater Buffalo, New York and Columbia, Maryland. Our principal executive offices are located at 10,000 Wehrle Drive, Clarence, New York 14031. Our telephone number at that location is (716) 759-6901. Our Internet address is WWW.GREATBATCH.COM.
3 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table provides summary consolidated financial data of our company for the periods indicated. You should read the summary consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with our consolidated financial statements and related notes appearing elsewhere in this prospectus.
The unaudited pro forma consolidated statement of operations data and cash flow data for the year ended December 31, 1999 and for the three months ended March 31, 2000 give effect to this offering and the application of the net proceeds of this offering to repay a portion of our indebtedness as if this offering and the repayment of indebtedness had occurred on January 2, 1999. The as adjusted consolidated balance sheet data is adjusted as if this offering and the repayment of indebtedness had occurred on March 31, 2000.
PRO FORMA YEAR ENDED PRO FORMA THREE MONTHS ENDED THREE MONTHS ------YEAR ENDED ------ENDED JANUARY 1, DECEMBER 31, DECEMBER 31, APRIL 2, MARCH 31, MARCH 31, 1999(1) 1999 1999 1999 2000 2000 CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues...... $ 75,268 $76,590 $ $19,886 $22,526 $ Cost of goods sold...... 36,454 41,057 10,024 12,936 ------Gross profit...... 38,814 35,533 9,862 9,590
Costs and expenses: Selling, general and administrative.... 9,391 7,235 2,144 1,974 Research, development and engineering...... 12,190 9,339 2,772 2,520 Other expenses: Interest expense...... 10,572 13,420 3,298 3,985 Intangible amortization...... 5,197 6,510 1,638 1,627 Other...... 364 1,343 74 61 ------Income (loss) before income taxes...... 1,100 (2,314) (64) (577) Income tax expense (benefit)...... 410 (605) (17) (184) Cumulative effect of accounting change... -- (563) (563) ------Net income (loss)...... $ 690 $(2,272) $ $ (610) $ (393) $ ======Net earnings (loss) per share (2): Basic...... $ 0.04 $ (0.11) $ $ (0.03) $ (0.02) $ Diluted...... $ 0.04 $ (0.11) $ $ (0.03) $ (0.02) $ Weighted average shares outstanding (2): Basic...... 17,436 20,818 20,665 21,027 Diluted...... 18,173 20,818 20,665 21,027
CONSOLIDATED CASH FLOW DATA: Cash provided by operating activities.... $ 8,927 $ 6,900 $ 593 $ 4,631 Cash used in investing activities...... (83,375) (8,847) (1,723) (2,185) Cash provided by (used in) financing activities...... 76,269 1,670 (775) (3,835) EBITDA (3)...... 20,543 22,152 6,107 6,429
AT MARCH 31, 2000 ------ACTUAL AS ADJUSTED ------CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents...... $ 2,474 $ Total assets...... 187,782 Total debt...... 128,932 Total stockholders' equity...... 45,980
4 (1) In August 1998, we acquired the assets and liabilities of Hittman Materials and Medical Components, Inc., or Hittman. These figures include the results of operations of Hittman from August 8, 1998 to January 1, 1999.
(2) We calculate basic earnings per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. We calculate diluted earnings (loss) per share by adjusting for common stock equivalents, which consist of stock options. During the year ended December 31, 1999, the three months ended April 2, 1999 and March 31, 2000 and the pro forma three months ended March 31, 2000, there were options to purchase 848, 829, 909 and 909 shares of common stock, respectively, that have not been included in the computation of diluted earnings per share because to do so would be antidilutive for those periods. Diluted earnings per share for the year ended January 1, 1999 includes the potentially dilutive effect of stock options.
(3) When we refer to EBITDA, we mean net earnings or loss before interest expense, income taxes, depreciation and amortization. We have included EBITDA because our management and industry analysts generally consider it to be a measurement of the financial performance of our company that provides a relevant basis for comparison among companies. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of EBITDA might differ from similarly titled measures for other companies.
5 RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD UNDERSTAND THE HIGH DEGREE OF RISK INVOLVED. YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS AND OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. THE FOLLOWING RISKS AND UNCERTAINTIES ARE NOT THE ONLY ONES WE FACE. HOWEVER, THESE ARE THE RISKS OUR MANAGEMENT BELIEVES ARE MATERIAL. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED. AS A RESULT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF
THEM, WE WOULD LOSE A SUBSTANTIAL PORTION OF OUR REVENUES.
A substantial portion of our business in 1999 was conducted with a limited number of customers, including Guidant, St. Jude Medical, Medtronic, Biotronik and Sulzer Intermedics, which was acquired by Guidant in 1999. Guidant accounted for approximately 34% of our revenues and St. Jude Medical accounted for approximately 32% of our revenues in 1999. As a result, we depend heavily on revenues from Guidant and St. Jude Medical. Our supply agreements, particularly with our large customers, might not be renewed in the future after they expire, including our agreements with Guidant, which expires in 2001, and St. Jude Medical, which expires in 2003. The loss of any large customer for any reason could harm our business, financial condition and results of operations.
IF WE DO NOT RESPOND TO CHANGES IN TECHNOLOGY, OUR PRODUCTS MAY BECOME OBSOLETE AND WE MAY EXPERIENCE REDUCED SALES AND A LOSS OF CUSTOMERS, WHICH WOULD NEGATIVELY AFFECT OUR REVENUES.
We sell our products to customers in several industries that are characterized by rapid technological changes, frequent new product introductions and evolving industry standards. For example, in 1998, an industry-wide design change in ICDs occurred, resulting in new ICDs using one battery instead of two. Primarily as a result of this design change, our implantable power source revenues decreased 22% in 1999 compared to 1998. Without the timely introduction of new products and enhancements, our products and services will likely become technologically obsolete over time and we may lose a number of our customers. In addition, other new products introduced by our customers may require fewer of our power sources or components. We dedicate a significant amount of resources to the development of our power sources and other products and technologies and we would be harmed if we did not meet customer requirements and expectations. Our inability, for technological or other reasons, to successfully develop and introduce new and innovative power sources and other products could cause our business to suffer. If this occurs, our revenues and operating results would suffer.
IF WE ARE UNABLE TO SUCCESSFULLY MARKET OUR CURRENT OR FUTURE PRODUCTS, OUR
BUSINESS WILL BE HARMED.
The market for our power sources, components and other products has been growing in recent years. If the market for our products does not grow as rapidly as forecasted by industry experts, our revenues could be less than expected. In addition, it is difficult to predict the rate at which the market for our products will grow or at which new and increased competition will result in market saturation. Slower growth in the pacemaker and ICD markets in particular would negatively impact our revenues. In addition, we face the risk that our products will lose widespread market acceptance. We cannot assure you that our customers will continue to utilize the products we offer or that a market will develop for our future products. We may at times determine that it is not technically or economically feasible for us to manufacture future products and we may not be successful in developing or marketing them. Additionally, new technologies that we develop may not be rapidly accepted because
6 of industry-specific factors, including the need for regulatory clearance, entrenched patterns of clinical practice and uncertainty over third party reimbursement. If this occurs, our business will be harmed.
WE ARE CURRENTLY EXPERIENCING LOSSES AND MAY NOT BECOME PROFITABLE IN THE
FUTURE.
We are currently experiencing losses and we cannot assure you that we will become profitable in the foreseeable future, if ever. For the three months ended March 31, 2000, and the year ended December 31, 1999, we had losses of $0.4 million and $2.3 million, respectively. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
AMORTIZATION OF OUR INTANGIBLE ASSETS, WHICH REPRESENT A SIGNIFICANT PORTION OF OUR TOTAL ASSETS, WILL ADVERSELY IMPACT OUR NET INCOME AND WE MAY NEVER REALIZE THE FULL VALUE OF OUR INTANGIBLE ASSETS.
As of December 31, 1999, we had $112.9 million of intangible assets, representing 60% of our total assets and 245% of our stockholders' equity. These intangible assets consist primarily of goodwill arising from our acquisition of Hittman and accruals relating to our trademarks and patented technology. We expect to incur amortization expenses relating to these intangible assets of $8.0 million in each of 2000 and 2001. These expenses will reduce our future earnings or increase our future losses. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. The material concentration of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of these intangible assets are impaired, and in the event of such a charge to earnings, the market price of our common stock could be adversely affected.
WE ARE SUBJECT TO PRICING PRESSURES FROM CUSTOMERS, WHICH COULD HARM OUR
OPERATING RESULTS.
We have made price concessions to some of our large customers in recent years and we expect customer pressure for pricing concessions will continue. Further, price concessions or reductions may cause our operating results to suffer. In addition, any delay or failure by a large customer to make payments due to us also could harm our operating results or financial condition.
QUALITY PROBLEMS WITH OUR POWER SOURCES AND OTHER PRODUCTS COULD HARM OUR REPUTATION FOR PRODUCING HIGH QUALITY PRODUCTS AND ERODE OUR COMPETITIVE ADVANTAGE.
Our power sources and other products are held to high quality standards. In the event our power sources and other products fail to meet these standards, our reputation for producing high quality power sources and other products could be harmed, which would damage our competitive advantage.
OUR OPERATING RESULTS MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO FORECAST
OUR FUTURE PERFORMANCE AND MAY RESULT IN VOLATILITY IN OUR STOCK PRICE.
Our operating results have fluctuated in the past and are likely to fluctuate significantly from quarter to quarter due to a variety of factors, including:
- the fixed nature of a substantial percentage of our costs, which results in our operations being particularly sensitive to fluctuations in revenue;
- our competitors' announcements of new products or technological innovations;
- changes in the relative portion of our revenue represented by our various products and customers;
- timing of orders placed by our principal customers who account for a significant portion of our revenues;
- competitive pressures resulting in lower selling prices; and
- increased costs of raw materials or supplies.
7 It is possible that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors. If this happens, the market price of our common stock may decline significantly.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our proprietary rights to our technologies and products. As of May 1, 2000, we held 137 active patents. We cannot guarantee that the steps we have taken or will take to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. In addition to seeking formal patent protection whenever possible, we attempt to protect our proprietary rights and trade secrets by entering into confidentiality and non-compete agreements with employees, consultants and third parties with which we do business. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us and we may be unable to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures. If our trade secrets become known, we may lose our competitive advantages.
In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our patents or other proprietary rights, our business could be seriously harmed. We may be required to spend significant resources to monitor our intellectual property rights, we may not be able to detect infringement of these rights and may lose our competitive advantages associated with our intellectual property rights before we do so. In addition, competitors may design around our technology or develop competing technologies that do not infringe on our proprietary rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS, WHICH COULD BE COSTLY AND TIME CONSUMING AND COULD DIVERT OUR MANAGEMENT AND KEY PERSONNEL FROM OUR BUSINESS OPERATIONS.
In producing our power sources and other components for implantable medical devices, third parties may claim that we are infringing their intellectual property rights, and we may be found to have infringed those intellectual property rights. While we do not believe that any of our products infringe the intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may be used in our technology and products. In addition, third parties may claim that our patents have been improperly granted and may seek to invalidate our existing or future patents. Although we do not believe that any of our active patents should be subject to invalidation, if any claim for invalidation prevailed, the result could be greatly expanded opportunities for third parties to manufacture and sell products which compete with our products. We also typically do not receive significant indemnification from parties which license technology to us against third party claims of intellectual property infringement. Any litigation or other challenges regarding our patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved in producing our power sources and other components for implantable medical devices, and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of our products. Infringement claims, even if not substantiated, could result in significant legal and other costs and may be a distraction to management.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, OUR EARNINGS AND FINANCIAL
CONDITION COULD SUFFER.
The manufacture and sale of our products expose us to potential product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, our
8 products or use of our products with components or systems not manufactured or sold by us. Provisions contained in our agreements with key customers attempting to limit our damages, including provisions to limit damages to liability for gross negligence, may not be enforceable in all instances or may otherwise fail to protect us from liability for damages. Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or otherwise or require us to pay significant damages. The occurrence of product liability claims or product recalls could cause our earnings and financial condition to suffer.
We carry product liability insurance coverage which is limited in scope and amount. Our management believes that our insurance coverage is adequate given the risks we face. We cannot assure you that we will be able to maintain this insurance or to do so at reasonable cost and on reasonable terms. We also cannot assure you that this insurance will be adequate to protect us against a product liability claim that arises in the future.
WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM AND KEY PERSONNEL AND THE
LOSS OF ANY OF THEM COULD SIGNIFICANTLY HARM US.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key technical personnel. Our products are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop our power sources and other products. The loss or unavailability to us of any member of our senior management team or a key technical employee could significantly harm us. We face intense competition for these professionals from our competitors, our customers and other companies operating in our industry. To the extent that the services of members of our senior management team and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage and operate our company and to develop our products and technology. We cannot assure you that we would be able to locate or employ such qualified personnel on acceptable terms.
WE MAY NOT BE ABLE TO ATTRACT, TRAIN AND RETAIN A SUFFICIENT NUMBER OF
QUALIFIED PROFESSIONALS TO MAINTAIN AND GROW OUR BUSINESS.
Our success will depend in large part upon our ability to attract, train, retain and motivate highly-skilled employees and management. There is currently aggressive competition for employees who have experience in technology and engineering that is used in manufacturing and producing power sources and other components for implantable medical devices. We compete intensely with other companies to recruit and hire from this limited pool. The industries in which we compete for employees are characterized by high levels of employee attrition. Although we believe we offer competitive salaries and benefits, we may have to increase spending in order to retain personnel. In 1999, we temporarily reduced salaries company-wide by 10% and later restored salaries to their original levels. In connection with these salary reductions, we implemented various measures to retain our existing employees, including granting stock options to some of our key employees to compensate for the 10% reduction in salaries. In addition, if we cannot attract, train, retain and motivate qualified personnel, we may be unable to compete for new customers or retain existing customers. If a number of our employees resign from our company to join or form a competitor, the loss of these employees and any resulting loss of existing or potential clients to a competitor could harm our business, financial condition and results of operations. Any inability to attract, train, retain and motivate employees and management would cause our business, financial condition and results of operations to suffer.
WE RELY ON THIRD PARTY SUPPLIERS FOR RAW MATERIALS, KEY PRODUCTS AND SUBCOMPONENTS AND IF WE ARE UNABLE TO OBTAIN THESE MATERIALS, PRODUCTS AND SUBCOMPONENTS ON A TIMELY BASIS OR ON TERMS ACCEPTABLE TO US, OUR ABILITY TO MANUFACTURE PRODUCTS WILL SUFFER.
Our business depends on a continuous supply of raw materials. The principal raw materials used in our business include lithium, iodine, plastics, cases, lids, glass, screens, tantalum, ruthenium, tantalum
9 pellets and vanadium pentoxide. Raw materials needed for our business are susceptible to fluctuations due to transportation, government regulations, price controls, economic climate or other unforeseen circumstances. In addition, there are a limited number of worldwide suppliers of the lithium needed to manufacture our products. We cannot assure you that we will be able to continue to procure raw materials critical to our business.
We rely on third party manufacturers to supply many of our raw materials. For example, we rely on FMC to supply us with lithium for our power sources and HC Starks to supply us with tantalum powder and wire for capacitors. Manufacturing problems may occur with these and other outside sources, as a supplier may fail to develop and supply products and subcomponents to us on a timely basis, or may supply us with products and subcomponents that do not meet our quality, quantity and cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these products and subcomponents on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or on time. In addition, to the extent the processes that our suppliers use to manufacture products and subcomponents are proprietary, we may be unable to obtain comparable subcomponents from alternative suppliers.
WE MAY FACE COMPETITION FROM ONE OF OUR PRINCIPAL CUSTOMERS THAT COULD HARM OUR BUSINESS AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES WITH GREATER RESOURCES.
Competition in connection with the manufacturing of power sources for implantable medical devices may intensify in the future. One or more of our customers that manufactures implantable medical devices may undertake additional vertical integration initiatives and begin to manufacture some or all of their power source needs. Although Medtronic manufactures its own lithium batteries for its pacemakers and ICDs, to date, to our knowledge, Medtronic has not sold batteries to third parties. In 1999, Medtronic introduced a new ICD that reduced the number of batteries from two to one and caused us to lose some unit volume. If Medtronic were to begin selling power sources for implantable medical devices to third parties, our revenues could be harmed. As the implantable medical device industry continues to consolidate, this risk will intensify. In addition, new competitors may emerge, and our product lines may be threatened by new technologies or market trends that reduce the value of our product lines. Many of our potential implantable power source and component competitors, which include some of our customers, have greater name recognition, longer operating histories, larger customer bases, longer customer relationships and greater financial, technical, personnel and marketing resources than our company.
The market for commercial power sources is competitive, fragmented and subject to rapid technological change. Many other commercial power source suppliers are larger and have greater financial, operational, personnel, sales, technical and marketing resources than our company. These and other companies may develop products that are superior to ours, which could cause our results of operations to suffer.
ACCIDENTS AT ONE OF OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY
AFFECT OUR OPERATIONS.
Our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. Although we employ safety procedures in the design and operation of our facilities and we have not experienced any serious accidents or deaths, there is a risk that an accident or death could occur in one of our facilities. Any accident, such as a chemical spill, could result in significant manufacturing delays or claims for damages resulting from injuries, which would harm our operations and financial condition. The potential liability resulting from any such accident or death, to the extent not covered by insurance, could cause our business to suffer. Any disruption of operations at any of our facilities could harm our business.
10 IF WE ARE NOT SUCCESSFUL IN MAKING ACQUISITIONS TO EXPAND AND DEVELOP OUR
BUSINESS, OUR FINANCIAL RESULTS MAY SUFFER.
A component of our strategy is to make selective acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. For example, in August 1998, we acquired Hittman, a medical components manufacturer. Our continued growth will depend on our ability to identify and acquire companies that complement or enhance our business on acceptable terms. We may not be able to identify or complete future acquisitions. Some of the risks that we may encounter include expenses associated with, and difficulties in identifying, potential targets, the costs associated with incomplete acquisitions and higher prices for acquired companies because of competition for attractive acquisition targets. Our failure to acquire additional companies could cause our financial results to suffer.
WE MAY MAKE ACQUISITIONS THAT COULD SUBJECT US TO A NUMBER OF OPERATIONAL RISKS AND WE MAY NOT BE SUCCESSFUL IN INTEGRATING COMPANIES WE ACQUIRE INTO OUR EXISTING OPERATIONS.
We expect to make selective acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. However, implementation of our acquisition strategy entails a number of risks, including:
- inaccurate assessments of undisclosed liabilities;
- entry into markets in which we may have limited or no experience;
- diversion of our management's attention from our core businesses;
- potential loss of key employees or customers of the acquired businesses;
- difficulties in integrating the operations and products of an acquired business or in realizing projected efficiencies and cost savings; and
- increases in our indebtedness and a limitation in our ability to access additional capital when needed.
WE INTEND TO EXPAND INTO NEW MARKETS AND OUR PROPOSED EXPANSION PLANS MAY
NOT BE SUCCESSFUL.
We intend to expand into new markets through the development of new product applications based on our existing component technologies. These efforts have required, and will continue to require, us to make substantial investments, including significant research, development and engineering expenditures and capital expenditures for new, expanded or improved manufacturing facilities. We cannot assure you that we will be able to successfully manage expansion into new markets and products or that these efforts will not have an adverse impact on our business. Specific risks in connection with expanding into new markets include the inability to transfer our quality standards into new products, the failure of customers in new markets to accept our products and price competition.
OUR FAILURE TO OBTAIN LICENSES FROM THIRD PARTIES FOR NEW TECHNOLOGIES OR THE LOSS OF THESE LICENSES COULD IMPAIR OUR ABILITY TO DESIGN AND MANUFACTURE NEW PRODUCTS.
We occasionally license technologies from third parties rather than depending exclusively on our own proprietary technology and developments. For example, we license wet tantalum technology from the Evans Capacitor Company to produce our capacitors. Our ability to license new technologies from third parties is and will continue to be critical to our ability to offer new and improved products. We cannot assure you that we will be able to continue to identify new technologies developed by others and even if we are able to identify new technologies, we may not be able to negotiate licenses on favorable terms, or at all. Additionally, we could lose rights granted under licenses for reasons beyond our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent.
11 RISKS RELATED TO OUR INDUSTRY
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS POLITICAL, ECONOMIC AND REGULATORY CHANGES IN THE HEALTHCARE INDUSTRY WHICH COULD FORCE US TO MAKE MODIFICATIONS TO HOW WE DEVELOP AND PRICE OUR PRODUCTS.
The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Several of our product lines are subject to international, federal, state and local health and safety, packaging and product content regulations. In addition, implantable medical device products produced by our healthcare customers are subject to regulation by the United States Food and Drug Administration, or FDA, and similar international agencies. These regulations govern a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution. Compliance with these regulations may be time consuming, burdensome and expensive and could negatively affect our customers' abilities to sell their products, which in turn would adversely affect our ability to sell our products. This may result in higher than anticipated costs or lower than anticipated revenues.
These regulations are also complex, change frequently and have tended to become more stringent over time. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state levels. In addition, these regulations may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. We may be required to incur significant expenses to comply with these regulations or remedy past violations of these regulations. Any failure by our company to comply with applicable government regulations could also result in cessation of portions or all of our operations, impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are sold into regulated industries, we must comply with additional regulations in marketing our products.
OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATIONS THAT COULD BE COSTLY
FOR OUR COMPANY TO COMPLY WITH.
Federal, state and local regulations impose various environmental controls on the manufacturing, transportation, storage, use and disposal of batteries and hazardous chemicals and other materials used in the manufacturing of batteries. We cannot assure you that conditions relating to our historical operations which may require expenditures for clean-up will not arise in the future or that changes in environmental laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. We also cannot assure you that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be imposed. In addition, we cannot predict the effect that additional or modified regulations may have on us or our customers.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUES AND RESULTS OF OPERATIONS.
Many healthcare industry companies are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for our products. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our results of operations would suffer.
12 OUR BUSINESS IS INDIRECTLY SUBJECT TO HEALTHCARE INDUSTRY COST CONTAINMENT
MEASURES THAT COULD RESULT IN REDUCED SALES OF OUR PRODUCTS.
Our healthcare customers rely on third party payors, such as government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which our products are used. The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain approval for payment from these third party payors. If that occurred, sales of implantable medical devices may decline significantly, and our customers may reduce or eliminate purchases of our products. The cost containment measures that healthcare providers are instituting, both in the United States and internationally, could harm our ability to operate profitably.
OUR COMMERCIAL POWER SOURCE REVENUES ARE DEPENDENT ON CONDITIONS IN THE OIL
AND NATURAL GAS INDUSTRY, WHICH HISTORICALLY HAS BEEN VOLATILE.
Sales of our commercial power sources depend to a great extent upon the condition of the oil and gas industry and, specifically, the exploration and production expenditures of oil and gas companies. In the past, oil and natural gas prices have been volatile and the oil and gas exploration and production industry has been cyclical, and it is likely that oil and natural gas prices will continue to fluctuate in the future. The current and anticipated prices of oil and natural gas influence the oil and gas exploration and production business and are affected by a variety of political and economic factors beyond our control, including worldwide demand for oil and natural gas, worldwide and domestic supplies of oil and natural gas, the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels and pricing, the level of production of non-OPEC countries, the price and availability of alternative fuels, political stability in oil producing regions and the policies of the various governments regarding exploration and development of their oil and natural gas reserves. An adverse change in the oil and gas exploration and production industry or a reduction in the exploration and production expenditures of oil and gas companies could cause our revenues from commercial power sources to suffer.
RISKS RELATED TO THIS OFFERING
AN ACTIVE PUBLIC TRADING MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP AND THE
MARKET PRICE OF OUR COMMON STOCK MAY DECLINE BELOW THE PRICE OF THIS OFFERING.
Prior to this offering, you could not buy or sell our common stock publicly. Although we intend to apply to have our common stock listed on The New York Stock Exchange, an active public market for our common stock might not develop or be sustained after this offering. Moreover, even if an active market does develop, the market price of our common stock may decline below the initial public offering price.
THE POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR
STOCKHOLDERS.
Securities markets worldwide have recently experienced significant price and volume fluctuations, and the market prices of the securities of technology companies have been especially volatile. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock could decrease significantly. Investors may be unable to resell their shares of our common stock at or above the initial public offering price. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the object of securities class action litigation, we may face substantial costs and our management's attention and resources may be diverted, which could harm our business.
13 DLJ MERCHANT BANKING PARTNERS II, L.P. AND SOME OF ITS AFFILIATES CONTROL THE MAJORITY OF OUR VOTING STOCK AND AS A RESULT EXERT SIGNIFICANT INFLUENCE
OVER US AND MAY HAVE INTERESTS THAT CONFLICT WITH THOSE OF OTHER STOCKHOLDERS, INCLUDING PURCHASERS IN THIS OFFERING.
DLJ Merchant Banking Partners II, L.P. and some of its affiliates, which we refer to collectively as DLJ Merchant Banking, have substantial control over our company and may have different interests than those of other holders of our common stock. Prior to this offering, DLJ Merchant Banking held 81.1% of our outstanding common stock and after this offering, these entities will beneficially own approximately % of our outstanding common stock. As a result of its stock ownership and related contractual rights, DLJ Merchant Banking has significant control over our business policies and affairs, including the power to:
- nominate all but one member of our Board of Directors and elect our directors;
- appoint new management; and
- approve any action requiring the approval of the holders of common stock, including the adoption of amendments to our restated certificate of incorporation and approval of mergers or sales of all substantially all of our assets.
The parties to the stockholders agreements have agreed to vote in favor of DLJ Merchant Banking's director nominees. The directors elected by DLJ Merchant Banking have the ability to control decisions affecting the business and management of our company, including our capital structure. This includes the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends.
The general partners of each of the entities comprising DLJ Merchant Banking are affiliates or employees of Donaldson, Lufkin & Jenrette Securities Corporation, one of the joint book-running managers of this offering.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of common stock after this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Immediately after this offering, affiliates and holders of "restricted securities," as defined in Rule 144 under the Securities Act, will own 21,021,597 shares, representing approximately % of the outstanding shares of common stock. A decision by these persons to sell shares of common stock could adversely affect the trading price of our common stock.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH MAY REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A CHANGE OF CONTROL TRANSACTION.
Various provisions of our restated certificate of incorporation and bylaws and in Delaware corporate law may discourage, delay or prevent a change in control or takeover attempt of our company by a third party which is opposed to by our management and Board of Directors. Public stockholders who might desire to participate in such a transaction may not have the opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change of control or change in our management and Board of Directors. These provisions include:
- authorizing the issuance of "blank check" preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt;
- limiting who may call special meetings of our stockholders; and
14 - establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by our stockholders at stockholder meetings.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common stock will be substantially higher than the book value per share of our outstanding common stock. If you purchase common stock in this offering, you will incur immediate and substantial dilution in the net tangible book value per share of the common stock from the price you paid.
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS.
Some investors favor companies that pay dividends, particularly in market downturns. We currently intend to retain any future earnings for funding growth and, therefore we do not currently anticipate paying cash dividends on our common stock in the foreseeable future. Because we may not pay dividends, your return on this investment likely depends on your ability to sell our stock for a profit.
FORWARD LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. We have based these forward- looking statements on our current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to:
- future revenues, expenses and profitability;
- the future development and expected growth of our business and the implantable medical device industry;
- our ability to successfully execute our business model and our business strategy;
- our ability to identify trends within the industries for implantable medical devices, medical components and commercial power sources and to offer products and services that meet the changing needs of those markets;
- projected capital expenditures; and
- trends in government regulation.
You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those suggested by these forward-looking statements. In evaluating these statements, you should carefully consider the risks outlined under "Risk Factors."
In this prospectus, we rely on and refer to information and statistics regarding the implantable medical device industry and our market share in the sectors in which we compete. We obtained this information and statistics from various third party sources, discussions with our customers and/or our own internal estimates. We believe that these sources and estimates are reliable, but we have not independently verified them.
15 USE OF PROCEEDS
We estimate that the proceeds of this offering, assuming an initial public offering price of $ per share, which is the midpoint of the anticipated offering price range, and after deducting underwriting discounts and commissions and estimated offering expenses of $ payable by us, will be approximately $ million, or $ million if the underwriters exercise their over-allotment option in full.
We plan to use the net proceeds of this offering to repay indebtedness as follows:
- $25.0 million principal amount of senior subordinated notes which bear an annual interest rate of 13% and are due and payable on July 10, 2007, plus a redemption premium of approximately $ million;
- $ million of our Term A loans which bear an annual interest rate, at our option, of prime plus 2.25% or LIBOR plus 3.50% and are due and payable on September 30, 2004. As of May 1, 2000, the interest rate for our Term A loans was 9.63%; and
- $ million of our Term B loans which bear an annual interest rate, at our option, of prime plus 2.50% or LIBOR plus 3.75% and are due and payable on September 30, 2006. As of May 1, 2000, the interest rate for our Term B loans was 9.97%.
DLJ Merchant Banking and some of its affiliates, who were the principal purchasers of our 13% senior subordinated notes, will receive approximately $ as its pro rata share of the proceeds of this offering to be applied to the 13% senior subordinated notes.
DLJ Capital Funding, Inc., which led a syndicate of financial institutions that extended us the Term A loans and Term B loans, will receive approximately $ as its pro rata share of the proceeds of this offering to be applied to the Term A loans and Term B loans. DLJ Capital Funding, Inc. is affiliated with DLJ Merchant Banking, which holds approximately 81% of our outstanding common stock.
DIVIDEND POLICY
We do not intend to pay cash dividends in the foreseeable future. We currently intend to retain any earnings to further develop and grow our business and to reduce our indebtedness. We are a holding company and are dependent on distributions from our subsidiaries to meet our cash requirements. The terms of the credit agreement governing our credit facility restrict the ability of our subsidiaries to make distributions to us and, consequently, restrict our ability to pay dividends on our common stock.
16 CAPITALIZATION
The following table sets forth our cash and capitalization as of March 31, 2000 on an unaudited actual basis and on an unaudited as adjusted basis. Our capitalization as adjusted gives effect to the sale by us of shares of common stock offered by this prospectus at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses of $ payable by us and application of the net proceeds of this offering to repay a portion of our indebtedness as if this offering and the repayment of indebtedness had occurred on March 31, 2000. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and accompanying notes included elsewhere in this prospectus.
AS OF MARCH 31, 2000 ------(UNAUDITED) ACTUAL AS ADJUSTED (DOLLARS IN THOUSANDS) Cash and cash equivalents...... $ 2,474 $ ======Long-term debt: Credit facility: Term loans (1)...... $104,100 $ Revolving credit facility (2)...... 2,150 Senior subordinated notes (3)...... 22,682 ------Total long-term debt...... 128,932 Stockholders' equity: Preferred stock $.001 par value, 100,000,000 shares authorized and none outstanding (actual); 100,000,000 shares authorized and none outstanding (as adjusted).... Common stock $.001 par value; 100,000,000 shares authorized, 21,041,547 shares issued and 21,025,494 shares outstanding (actual); 100,000,000 shares authorized, shares issued and shares outstanding (as adjusted)...... 20 Capital in excess of par value...... 63,480 Retained deficit...... (17,376) Treasury stock, at cost (16,053 shares, actual and as adjusted)...... (144) ------Total stockholders' equity...... 45,980 ------Total capitalization...... $174,912 $ ======
(1) Term loans on an actual basis include outstanding Term A loans of $45.0 million and Term B loans of $59.1 million. Term loans on an as adjusted basis includes outstanding Term A loans of $ million and Term B loans of $ million.
(2) At March 31, 2000, we had a maximum principal amount of $13.0 million, of which $10.8 million was available, under our revolving credit facility, subject to customary borrowing conditions. If we meet the debt to EBITDA ratio contained in our credit agreement, after December 31, 2000, the maximum availability under our revolving credit facility will increase to $20.0 million.
(3) $25.0 million of proceeds from the senior subordinated notes was initially allocated between $21.8 million of senior subordinated notes and $3.2 million of common stock issued to the holders of the senior subordinated notes. The difference between the principal amount of the notes and the amount allocated is being amortized using the effective yield method and is charged to interest expense over the term of the senior subordinated notes. The balance on an actual basis as of March 31, 2000 of $22.7 million includes $0.9 million of amortization of the discount on the notes.
17 DILUTION
The pro forma net tangible book value of our common stock as of March 31, 2000 was $ million, or $ per share. Pro forma net tangible book value per share represents the amount of our total tangible assets, less the amount of our total liabilities, and then divided by the total number of shares of common stock outstanding. Dilution in pro forma net tangible book value per share represents the difference between the amount paid per share by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value at March 31, 2000 would have been $ million or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares at the initial public offering price. The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share...... $ Pro forma net tangible book value per share as of March 31, 2000...... $ Increase per share attributable to new investors...... ------Pro forma net tangible book value per share after the offering...... ------Dilution per share to new investors...... $ ======
The following table summarizes, on a pro forma basis as of March 31, 2000, the differences between the existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION ------AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------Existing stockholders...... % $ % $ New investors...... ------Total...... 100% $ 100% ======
The foregoing table excludes 967,028 shares of common stock to be issued upon the exercise of options outstanding under our stock option plans as of March 31, 2000 at a weighted average price of $5.34 per share. If all of these outstanding options are exercised, the percentage of total shares purchased by new investors will be further diluted from % to %.
18 SELECTED CONSOLIDATED FINANCIAL DATA
The following table provides selected financial data of our company for the periods indicated. You should read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and with our consolidated financial statements and related notes appearing elsewhere in this prospectus. The consolidated statement of operations data for the period from January 1, 1997 to July 10, 1997, the period from July 11, 1997 to January 2, 1998 and for the years ended January 1, 1999 and December 31, 1999, and the consolidated balance sheet data at January 1, 1999 and December 31, 1999 have been derived from our financial statements and related notes appearing elsewhere in this prospectus which have been audited by Deloitte & Touche LLP, independent auditors. The statement of operations data for the years ended December 31, 1995 and December 31, 1996 and the balance sheet data at December 31, 1995, December 31, 1996 and January 2, 1998 have been derived from our audited financial statements and related notes not included in this prospectus which have been audited by Deloitte & Touche LLP, independent auditors. The consolidated statement of operations data and cash flow data for the three months ended April 2, 1999 and March 31, 2000 and the consolidated balance sheet data at March 31, 2000 are unaudited but, in the opinion of management, include all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of our results for these interim periods. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of results to be expected for the entire year or for any period.
WILSON GREATBATCH LTD. (1) ------
YEAR ENDED DECEMBER 31, JANUARY 1, 1997 ------TO 1995 1996 JULY 10, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues...... $53,409 $49,644 $29,620 Cost of goods sold...... 28,437 26,070 14,922 ------Gross profit...... 24,972 23,574 14,698 Costs and expenses: Selling, general and administrative...... 8,924 8,610 5,881 Research, development and engineering..... 7,033 7,951 4,400 Other expenses: Interest expense...... 506 388 252 Intangible amortization...... ------Transaction related expenses...... -- -- 11,097 Write-off of purchased in-process research, development and engineering... ------Other...... (196) (124) (117) ------Income (loss) before income taxes...... 8,705 6,749 (6,815) Income tax expense (benefit) (3)...... 194 157 1,053 Cumulative effect of accounting change...... ------Net income (loss)...... $ 8,511 $ 6,592 $(7,868) ======
Net earnings (loss) per share (4): Basic...... $ 946 $ 732 $ (874) Diluted...... $ 946 $ 732 $ (874) Weighted average shares outstanding (4): Basic...... 9 9 9 Diluted...... 9 9 9
CONSOLIDATED CASH FLOW DATA: Cash provided by operating activities...... Cash used in investing activities...... Cash provided by (used in) financing activities...... EBITDA (5)(6)......
WILSON GREATBATCH TECHNOLOGIES, INC. ------YEAR ENDED THREE MONTHS ENDED JULY 11, 1997 ------TO JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, JANUARY 2, 1998 1999 (2) 1999 1999 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues...... $ 26,282 $ 75,268 $ 76,590 $ 19,886 $ 22,526 Cost of goods sold...... 12,241 36,454 41,057 10,024 12,936 ------Gross profit...... 14,041 38,814 35,533 9,862 9,590 Costs and expenses: Selling, general and administrative...... 4,501 9,391 7,235 2,144 1,974 Research, development and engineering..... 4,619 12,190 9,339 2,772 2,520 Other expenses: Interest expense...... 4,128 10,572 13,420 3,298 3,985 Intangible amortization...... 1,810 5,197 6,510 1,638 1,627 Transaction related expenses...... ------Write-off of purchased in-process research, development and engineering... 23,779 ------Other...... 74 364 1,343 74 61 ------Income (loss) before income taxes...... (24,870) 1,100 (2,314) (64) (577) Income tax expense (benefit) (3)...... (9,468) 410 (605) (17) (184) Cumulative effect of accounting change...... -- -- (563) (563) ------Net income (loss)...... $(15,402) $ 690 $ (2,272) $ (610) $ (393) ======Net earnings (loss) per share (4): Basic...... $ (1.04) $ 0.04 $ (0.11) $ (0.03) $ (0.02) Diluted...... $ (1.04) $ 0.04 $ (0.11) $ (0.03) $ (0.02) Weighted average shares outstanding (4): Basic...... 14,758 17,436 20,818 20,665 21,027 Diluted...... 14,758 18,173 20,818 20,665 21,027 CONSOLIDATED CASH FLOW DATA: Cash provided by operating activities...... $ 4,994 $ 8,927 $ 6,900 $ 593 $ 4,631 Cash used in investing activities...... (3,653) (83,375) (8,847) (1,723) (2,185) Cash provided by (used in) financing activities...... (932) 76,269 1,670 (775) (3,835) EBITDA (5)(6)...... (17,345) 20,543 22,152 6,107 6,429
19 WILSON GREATBATCH LTD. (1) WILSON GREATBATCH TECHNOLOGIES, INC. ------DECEMBER 31, ------JANUARY 2, JANUARY 1, DECEMBER 31, MARCH 31, 1995 1996 1998 1999 1999 2000 (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents...... $ 42 $ 54 $ 2,319 $ 4,140 $ 3,863 $ 2,474 Total assets...... 32,300 32,462 $111,709 194,390 189,779 187,782 Total debt...... 4,521 6,131 71,363 131,233 132,902 128,932 Total stockholders' equity...... 16,316 16,914 28,239 45,595 46,407 45,980
(1) The financial data for periods prior to July 11, 1997 relate to Wilson Greatbatch Ltd., our predecessor. (2) In August 1998, we acquired the assets and liabilities of Hittman. These figures include the results of operatons of Hittman from August 8, 1998 to January 1, 1999. (3) Wilson Greatbatch Ltd., our predecessor, incurred minimal state taxes as a former subchapter S corporation. The federal and state taxes for the period from January 1, 1997 to July 10, 1997 are directly attributable to our acquisition of our predecessor in July 1997. (4) We calculate basic earnings per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. We calculate diluted earnings (loss) per share by adjusting for common stock equivalents, which consist of stock options. During the period from July 11, 1997 to January 2, 1998, the year ended December 31, 1999 and the three months ended April 2, 1999 and March 31, 2000, there were options to purchase 441, 848, 829 and 909 shares of common stock, respectively, that have not been included in the computation of diluted earnings per share because to do so would be antidilutive for those periods. Diluted earnings per share for the year ended January 1, 1999 includes the potentially dilutive effect of stock options. (5) When we refer to EBITDA, we mean net earnings or loss before interest expense, income taxes, depreciation and amortization. We have included EBITDA because our management and industry analysts generally consider it to be a measurement of the financial performance of our company that provides a relevant basis for comparison among companies. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of EBITDA might differ from similarly titled measures for other companies.
(6) EBITDA for the period July 11, 1997 to January 2, 1998 would have been $7.8 million if we had excluded the $23.8 million write-off of purchased in-process research, development and engineering related to the July 1997 leveraged buyout and $1.4 million of other transaction expenses.
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are the leading developer and manufacturer of power sources and other components used in implantable medical devices, including wet tantalum capacitors and precision components. We leverage our core competencies in technology and manufacturing to develop and produce power sources for commercial applications that demand high performance and reliability. These applications include aerospace, oil and gas exploration and oceanographic equipment.
In July 1997, DLJ Merchant Banking and members of our management formed our company to acquire Wilson Greatbatch Ltd. from relatives of its founder, Mr. Wilson Greatbatch, in a leveraged buyout transaction. In the leveraged buyout transaction, DLJ Merchant Banking and its affiliates initially acquired approximately 86% of our outstanding common stock. In connection with the leveraged buyout, we issued $25.0 million principal amount of 13% senior subordinated notes, entered into a $10.0 million revolving line of credit and incurred $50.0 million of senior Term A and Term B loans. Affiliates of DLJ Merchant Banking originally purchased $22.5 million of the principal amount of the notes and led a syndicate of financial institutions in extending us the line of credit and term loans. In October 1997, an affiliate of DLJ Merchant Banking transferred $5.0 million of the principal amount of the notes to an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The leveraged buyout generated $82.9 million in intangible assets, of which approximately $6.1 million was allocated to goodwill. In connection with the leveraged buyout, we recorded a one time write-off of $23.8 million of purchased in-process research, development and engineering costs.
In August 1998, we acquired Hittman, a medical components manufacturer, for $71.8 million. At the time of the of acquisition, we paid $69.0 million. A portion of the consideration was contingent upon Hittman achieving certain financial targets after the acquisition. Some of these targets were achieved in 1998 and we subsequently paid $2.8 million to the former owner of Hittman. In connection with our acquisition of Hittman, we borrowed an additional $60.0 million of Term A and Term B loans and increased our revolving line of credit up to a maximum of $20.0 million. We recorded the Hittman acquisition using the purchase method of accounting. The excess of the purchase price over the fair value of the net assets that we acquired was $67.7 million, of which $17.4 million was allocated to identifiable intangible assets and $50.3 million was allocated to goodwill. Sales by Hittman of $8.8 million are reflected in our 1998 results.
In 1997, we entered into an agreement with one of our customers to develop custom capacitors that use wet tantalum technology for use in their ICDs. Wet tantalum is a relatively new technology that provides a number of performance advantages over existing technologies. In 1999 and the first three months of 2000, we incurred start-up costs related to our capacitor operations of $5.7 million. We believe that this amount will represent substantially all of our start-up costs. We began selling our new wet tantalum capacitors commercially in the fourth quarter of 1999. In the second quarter of 2000, we entered into a development contract with another principal customer to create another line of custom wet tantalum capacitors. We believe that our revenues in 2000 and 2001 from capacitor sales will grow at a higher rate than sales of our other medical products and that our capacitor program will become profitable in 2001.
21 Our fiscal year ends on the closest Friday to December 31. Accordingly, our fiscal year will periodically contain more or less than 365 days. For example, fiscal 1997 ended on January 2, 1998 and fiscal 1998 ended on January 1, 1999. Our fiscal quarters are three-month periods that end on the Friday closest to the end of the applicable calendar quarter.
REVENUE AND EXPENSE COMPONENTS
REVENUES
We derive revenues from the sale of medical and commercial products. Our medical revenues consist of sales of implantable power sources, capacitors and components. Our commercial revenues consist of sales of commercial power sources. A substantial part of our business is conducted with a limited number of customers. Guidant accounted for approximately 34% of our revenues and St. Jude Medical accounted for approximately 32% of our revenues in 1999. We have entered into long term supply agreements ranging from two to ten years with most of our large customers.
Our implantable power source revenues are derived from sales of batteries for pacemakers, ICDs and other implantable medical devices. The majority of our implantable power source customers contract with us to develop custom batteries to fit their product specifications. We are the sole provider of these products to many of our customers.
Our capacitor revenues are derived from sales of our wet tantalum capacitors, which we developed for use in ICDs. We expect to enter into long term agreements of more than one year with our capacitor customers and add new customers in an effort to increase our capacitor revenues.
Our components revenues are derived from sales of feedthroughs, electrodes and other precision components principally used in pacemakers and ICDs. We also sell our components for use in other implantable medical devices, such as left ventricular assist devices, hearing assist devices, drug pumps, neurostimulators and other medical applications.
Our commercial power source revenues are primarily derived from sales of batteries for use in oil and gas exploration, including recovery equipment, pipeline inspection gauges, down-hole pressure measurement systems and seismic surveying equipment. We also supply batteries to NASA for its space shuttle program and other demanding commercial applications.
For each of our products, we recognize revenue when the products are shipped. We do not give warranties to our customers for our products and to date, returns have been immaterial. We have two other sources of cash flow, royalties and cost reimbursements for certain research, development and engineering. We record royalties as an offset to selling, general and administrative expenses and cost reimbursements as an offset to research, development and engineering costs. Currently, Medtronic is our sole source of royalty fees. Royalties are recognized based on the reported number of units sold. The royalty agreement with Medtronic expires in all material respects in 2000. After the Medtronic royalty agreement expires, in the absence of new royalties to record as an offset, we expect recorded selling, general and administrative expenses to increase substantially. We recognize cost reimbursements from some of our customers upon achieving certain milestones related to designing batteries and capacitors for their products. The cost reimbursement charged to customers represents actual costs incurred by us in the design and testing of prototypes built to customer specifications. This cost reimbursement does not include a mark-up. Price concessions have not significantly affected revenues in the historical periods presented.
EXPENSES
Cost of goods sold includes materials, labor and other manufacturing costs associated with the products we sell. We have included start-up costs associated with the production of our capacitors in cost of goods sold. As a result, costs associated with capacitors prior to the fourth quarter of 1999,
22 when we began to commercially offer these products, were substantially in excess of revenue generated from capacitor sales.
Selling, general and administrative expenses include salaries, facility costs and patent-related expenses. We record royalties as an offset to selling, general and administrative expenses.
Research, development and engineering expenses include costs associated with the design, development, testing, deployment and enhancement of our products. We record design fees as an offset to research, development and engineering expenses.
Other expenses primarily include amortization of intangible assets and interest expense. Amortization of intangible assets is primarily related to the leveraged buyout and our acquisition of Hittman. Interest expense is primarily related to indebtedness we assumed in connection with these transactions. We expect to use the proceeds of this offering to repay all of our outstanding $25.0 million principal amount of senior subordinated notes plus a redemption premium in the amount of $ million. We expect to use the remainder of the proceeds to repay a portion of our outstanding Term A and Term B loans.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage which the listed amounts bear to total revenues:
FIRST THREE FISCAL YEAR MONTHS OF ------PRO FORMA 1997 (1) 1998 1999 1999 2000 Revenues: Implantable power sources...... 68.8% 64.1% 49.4% 55.2% 43.8% Capacitors...... 0.0 0.2 3.0 1.5 14.6 Medical components...... 10.2 18.6 34.5 30.1 31.3 ------Total medical revenues...... 79.0 82.8 86.9 86.9 89.7 Commercial power sources...... 21.0 17.2 13.1 13.1 10.3 ------Total revenues...... 100.0% 100.0% 100.0% 100.0% 100.0% ======
Income statement data as a percentage of revenues: Gross profit...... 51.4% 51.6% 46.4% 49.6% 42.6%
Net income (loss)...... (2.8) 0.9 (3.0) (3.1) (1.7)
EBITDA(2)...... 29.0 27.3 28.9 30.7 28.5
(1) The unaudited pro forma data for fiscal 1997 gives effect to the July 1997 leveraged buyout as if it had occurred on January 1, 1997.
(2) When we refer to EBITDA, we mean net earnings or loss before interest expense, income taxes, depreciation and amortization. We have included EBITDA because our management and industry analysts generally consider it to be a measurement of the financial performance of our company that provides a relevant basis for comparison among companies. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of EBITDA might differ from similarly titled measures for other companies.
23 FIRST THREE MONTHS OF 2000 COMPARED TO FIRST THREE MONTHS OF 1999
REVENUES
Total revenues for the first three months of 2000 were $22.5 million, a $2.6 million, or 13%, increase from $19.9 million for the first three months of 1999. Implantable power source revenues for the first three months of 2000 were $9.9 million, a $1.1 million, or 10%, decrease from $11.0 million for the first three months of 1999. This decrease was primarily due to reduced battery sales as a result of an industry-wide design change in ICDs that reduced the number of batteries from two to one. Capacitor revenues for the first three months of 2000 were $3.3 million, a $3.0 million, or 973%, increase from $0.3 million for the first three months of 1999. This increase resulted primarily because we began selling our new wet tantalum capacitors commercially in the fourth quarter of 1999. Medical components revenues for the first three months of 2000 were $7.0 million, a $1.0 million, or 18%, increase from $6.0 million for the first three months of 1999. This increase was primarily due to higher sales of implantable medical devices by our customers, as well as our sales of a broader range of components. Commercial power source revenues for the first three months of 2000 were $2.3 million, a $0.3 million, or 11%, decrease from $2.6 million for the first three months of 1999. This decrease was primarily due to continued weakness in the oil and gas industry.
GROSS PROFIT
Gross profit for the first three months of 2000 was $9.6 million, a $0.3 million, or 3%, decrease from $9.9 million for the first three months of 1999. As a percentage of total revenues, gross profit for the first three months of 2000 declined to 43% from 50% for the first three months of 1999. The significant decrease as a percentage of total revenues reflected the revenue decrease in established, profitable product lines, such as power sources, while newer products with high start-up costs, such as capacitors, had revenue increases. The decrease in gross profit attributable to the decrease in implantable power source revenue was $0.6 million. Increased costs incurred with respect to our capacitor line further decreased gross profit by $0.3 million. These decreases were partially offset by $0.6 million in increases from the sale of medical components.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first three months of 2000 were $2.0 million, a $0.2 million, or 8%, decrease from $2.1 million for the first three months of 1999. As a percentage of total revenues, selling, general and administrative expenses for the first three months of 2000 declined to 9% from 11% for the first three months of 1999. This decrease was primarily due to several actions that we took to streamline expenses, the most significant of which was a reduction in discretionary operating expenses. As compared to the first quarter of 1999, salaries in the first quarter of 2000 increased by $0.2 million and discretionary operating expenses decreased by $0.4 million. We took these actions primarily in response to a decline in revenues from some of our products in 1999.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for the first three months of 2000 were $2.5 million, a $0.3 million, or 9%, decrease from $2.8 million for the first three months of 1999. As a percentage of total revenues, research, development and engineering expenses for the first three months of 2000 declined to 11% from 14% for the first three months of 1999. This was due to a $0.1 million decrease in salaries and a $0.2 million decrease in discretionary operating expenses. Our funding of programs that we believed to be important to our future growth was not affected by these reductions.
24 OTHER EXPENSES
Other expenses for the first three months of 2000 were $5.7 million, a $0.7 million, or 14%, increase from $5.0 million for the first three months of 1999. This increase was primarily due to an increase in interest rates. As a percentage of total revenues, other expenses were 25% for both periods.
PROVISION FOR INCOME TAXES
Our effective tax rate increased to 32% for the first three months of 2000 from 27% for the first three months of 1999. This increase resulted primarily from the recapture of federal alternative minimum tax credits at a 20% tax rate, resulting in a rate differential of 15% from the federal statutory rate as well as state tax benefits derived from related state tax credits.
NET LOSS
As a result of the reasons described above, as well as the nonrecurring cumulative effect of an accounting change which resulted in a charge of $0.6 million, net of taxes, net loss for the first three months of 2000 was $0.4 million, a $0.2 million decrease from net loss of $0.6 million for the first three months of 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Total revenues for 1999 were $76.6 million, a $1.3 million, or 2%, increase from $75.3 million for 1998. Implantable power source revenues for 1999 were $37.8 million, a $10.4 million, or 22%, decrease from $48.2 million for 1998. This decrease was primarily due to a 1999 industry-wide design change in ICDs that reduced the number of batteries from two to one and the loss of market share by our ICD battery customers as a result of the introduction of a new ICD by Medtronic. Medtronic manufactured its own power sources for this ICD. This decrease was also due to a reduction in demand resulting from Guidant's acquisition and subsequent closure of operations of Sulzer Intermedics, which previously purchased batteries from us. This decrease was partially offset by the successful launch of a new pacemaker by one of our customers and increased demand and orders from one of our customers that secured a government contract for pacemakers. Capacitor revenues for 1999 were $2.3 million, a $2.2 million increase from $0.1 million for 1998. This increase resulted primarily because we began selling our new wet tantalum capacitors commercially in the fourth quarter of 1999. Medical components revenues for 1999 were $26.4 million, a $12.4 million, or 88%, increase from $14.0 million for 1998. This increase was primarily due to the inclusion of a full year of operations from our Hittman acquisition. Commercial power source revenues for 1999 were $10.0 million, a $2.9 million, or 23%, decrease from $12.9 million for 1998. This decrease was primarily due to continued weakness in the oil and gas industry.
GROSS PROFIT
Gross profit for 1999 was $35.5 million, a $3.3 million, or 8%, decrease from $38.8 million for 1998. As a percentage of revenues, gross profit for 1999 declined to 46% from 52% in 1998. The decrease in implantable power source gross profit amounted to 9% of revenue, while capacitor start-up costs totaled 5% of revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1999 were $7.2 million, a $2.2 million, or 23%, decrease from $9.4 million for 1998. As a percentage of revenues, selling, general and administrative expenses for 1999 declined to 9% from 13% in 1998. These decreases were due to a temporary reduction in salaries, the deferral of annual merit increases, a reduction in incentive compensation, a general cutback in discretionary expenses and a reduction in the number of our employees.
25 The temporary reduction in salaries was in effect from April 1999 through December 1999 and reduced selling, general and administrative expenses by $0.3 million in 1999. The reduction in incentive compensation, including both management bonuses and broad-based profit sharing, reduced expenses by $1.0 million compared to 1998. Receipts from royalties, which are accounted for as an offset to related selling, general and administrative expenses, increased by $0.6 million. Discretionary expenses in 1999 were $0.3 million lower than in 1998. Three employees accounted for in selling, general and administrative expenses were terminated as part of the 1999 cost reductions, with total cost savings of less than $0.1 million, net of severance benefits.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for 1999 were $9.3 million, a $2.9 million, or 23%, decrease from $12.2 million for 1998. As a percentage of total revenues, research, development and engineering expenses in 1999 declined to 12% from 16% in 1998. Beginning in 1999, as we anticipated achieving production volumes of our capacitors, we accounted for costs associated with our capacitor program as cost of goods sold, selling, general and administrative expenses and research, development and engineering expenses. In prior years, these costs were recognized only as research, development and engineering expenses. This had the effect of lowering research, development and engineering expenses in 1999 by $1.4 million as compared to 1998. In addition, in 1999, we had no research, development and engineering expenses for Greatbatch Scientific, one of our product lines, which we sold in 1998. The amount of the decrease in research, development and engineering expenses resulting from the sale of Greatbatch Scientific was $0.8 million. Greatbatch Scientific was a developer of battery- powered surgical tools that were magnetic resonance imaging, or MRI, compatible and incurred $0.8 million in research, development and engineering expenses in 1998.
Costs were also reduced in 1999 for the same programs as were discussed above under the caption "--Selling, general and administrative expenses." The temporary reduction in salaries reduced costs in 1999 by $0.3 million. The reduction in incentive compensation reduced expenses by $0.6 million. Four employees accounted for in research, development and engineering expenses were terminated as part of the 1999 cost reductions, with total cost savings of $0.1 million, net of severance benefits. Non-refundable engineering fees, which serve to offset expenses, declined by $0.3 million in 1999 compared to 1998.
OTHER EXPENSES
Other expenses for 1999 were $21.3 million, a $5.2 million, or 32%, increase from $16.1 million for 1998. As a percentage of total revenues, other expenses for 1999 increased to 28% from 21% in 1998. This increase was primarily due to incurring a full year of interest expense and amortization of intangible assets related to the Hittman acquisition. In addition, we also wrote down $0.9 million of our $2.4 million investment in an unaffiliated company, which we acquired in conjunction with our sale of Greatbatch Scientific.
PROVISION FOR INCOME TAXES
Our effective tax rate declined to 26% in 1999 from 37% in 1998. This decrease resulted primarily from the recapture of federal alternative minimum tax credits at a 20% tax rate, resulting in a rate differential of 15% from the federal statutory rate as well as state tax benefits derived from related state tax credits.
NET INCOME (LOSS)
Net loss was $2.3 million for 1999, a $3.0 million decrease from net income of $0.7 million for 1998. This decrease was primarily due to an increase in cost of goods sold and higher other expenses, as described above, as well as the nonrecurring cumulative effect of an accounting change which resulted in a charge of $0.6 million, net of taxes.
26 FISCAL 1998 COMPARED TO FISCAL 1997
The following table summarizes consolidated statement of operations data for Wilson Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997 and for Wilson Greatbatch Technologies, Inc. for the period from July 11, 1997 to January 2, 1998 and, fiscal 1998 and unaudited pro forma fiscal 1997 as if the July 1997 leveraged buyout had occurred on January 1, 1997. These pro forma amounts were derived by combining financial data from the audited historical financial statements of both Wilson Greatbatch Ltd. and Wilson Greatbatch Technologies, Inc. for fiscal 1997. Pro forma 1997 data excludes a $23.8 million write-off of in-process research, development and engineering expense and $11.1 million of transaction related expenses associated with the leveraged buyout. In addition, pro forma 1997 data reflects additional interest of $3.9 million and amortization of $1.8 million incurred in connection with the leveraged buyout. Income tax benefit was calculated at a statutory rate of 38%.
WILSON GREATBATCH TECHNOLOGIES, INC. WILSON GREATBATCH LTD. ------JANUARY 1, 1997 JULY 11, 1997 TO TO PRO FORMA JULY 10, 1997 JANUARY 2, 1998 FISCAL 1997 FISCAL 1998 ------(IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues...... $ 29,620 $ 26,282 $ 55,902 $ 75,268 Cost of goods sold...... 14,922 12,241 27,163 36,454 ------Gross profit...... 14,698 14,041 14,041 38,814 Costs and expenses: Selling, general and administrative expenses...... 5,881 4,501 10,382 9,391 Research, development and engineering expenses...... 4,400 4,619 9,019 12,190
Other expenses: Interest expense...... 252 4,128 8,256 10,572 Intangible amortization...... -- 1,810 3,620 5,197 Transaction related expenses...... 11,097 ------Write-off of purchased in-process research, development and engineering costs, net...... -- 23,779 -- -- Other...... (117) 74 -- 364 ------
Income (loss) before income taxes...... (6,815) (24,870) (2,538) 1,100
Income tax expense (benefit)...... 1,053 (9,468) (964) 410 ------Net income (loss)...... $ (7,868) $(15,402) $ (1,574) $ 690 ======EBITDA (1)...... N/A $(17,345) $ 16,224 $ 20,543 ======
(1) When we refer to EBITDA, we mean net earnings or loss before interest expense, income taxes, depreciation and amortization. We have included EBITDA because our management and industry analysts generally consider it to be a measurement of the financial performance of our company that provides a relevant basis for comparison among companies. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered a substitute for net income or loss as a measure of performance, or to cash flow as a measure of liquidity. Investors should note that this calculation of EBITDA might differ from similarly titled measures for other companies.
The following analysis compares historical fiscal 1998 results to the combined historical fiscal 1997 amounts for revenues, gross profit, selling, general and administrative expenses and research, development and engineering expenses as the results of the combined historical amounts include no pro forma adjustments. Other expenses, provision for income taxes and net income (loss) compares historical fiscal 1998 to the period from July 11, 1997 to January 2, 1998, and compares the July 11, 1997 to January 2, 1998 historical data to the January 1, 1997 to July 10, 1997 historical data.
27 REVENUES
Total revenues for 1998 were $75.3 million, a $19.4 million, or 35%, increase from $55.9 million for 1997. Implantable power source revenues for 1998 were $48.2 million, a $9.8 million, or 26%, increase from $38.4 million for 1997. This increase was primarily due to increased sales of implantable power sources due to the introduction of a new generation of ICDs by our customers. Medical components revenues for 1998 were $14.1 million, an $8.3 million, or 145%, increase from $5.7 million for 1997. This increase was primarily due to the inclusion of results of operations from our Hittman acquisition beginning in August 1998. Commercial power source revenues for 1998 were $12.9 million, a $1.1 million, or 10%, increase from $11.8 million for 1997. This increase was primarily due to increased demand for our products for pipeline inspection gauges and measurement while drilling equipment.
GROSS PROFIT
Gross profit for 1998 was $38.8 million, a $10.1 million, or 35%, increase from $28.7 million for 1997. As a percentage of total revenues, gross profit in 1998 increased to 52% from 51% in 1997. This increase in gross profit was primarily related to an increase in our implantable power source revenues, as well as a shift in the sales mix toward higher margin ICD products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 1998 were $9.4 million, a $1.0 million, or 10%, decrease from $10.4 million for 1997. As a percentage of total revenues, selling, general and administrative expenses in 1998 decreased to 13% from 19% in 1997. These decreases were primarily due to a reduction in corporate office costs and the inclusion of a partial year of Greatbatch Scientific's selling, general and administrative expenses compared to a full year of those expenses in 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
Research, development and engineering expenses for 1998 were $12.2 million, a $3.2 million, or 35%, increase from $9.0 million for 1997. This increase was primarily due to start-up expenses incurred in establishing our line of capacitor products. As a percentage of total revenues, research, development and engineering expenses were 16% for both periods.
OTHER EXPENSES
Other expenses for 1998 were $16.1 million, a $13.7 million, or 46%, decrease from $29.8 million for the period from July 11, 1997 to January 2, 1998. This decrease was primarily due to the absence of any write-off of purchased in-process research, development and engineering in 1998. Other expenses for the period from July 11, 1997 to January 2, 1998 were $29.8 million, an $18.6 million, or 166%, increase from $11.2 million for the period from January 1, 1997 to July 10, 1997. This increase was primarily due to Wilson Greatbatch Ltd.'s having minimal interest expense and no amortization expense and the impact of the write-off of purchased in-process research, development and engineering for the period from July 11, 1997 to January 2, 1998.
PROVISION FOR INCOME TAXES
Our effective tax rate for 1998 was 37%, or a 1% decrease from 38% for the period from July 11, 1997 to January 2, 1998. Our effective tax rate for both periods approximated the combined federal and state statutory rate. The federal and state taxes for the period from January 1, 1997 to July 10, 1997 are directly attributable to the acquisition of Wilson Greatbatch Ltd., which incurred only minimal state taxes as a former subchapter S corporation.
NET INCOME (LOSS)
Net income was $0.7 million for 1998, a $16.1 million, or %, increase over a net loss of $15.4 million for the period from July 11, 1997 to January 2, 1998. This increase in net income in 1998 was primarily attributable to a full year of operating results, increased gross profit and the absence of any
28 write-off of purchased in-process research, development and engineering. Net loss was $15.4 million for the period from July 11, 1997 to January 2, 1998, a $7.5 million increase from a net loss of $7.9 million for the period from January 1, 1997 to July 10, 1997. This increase in net loss for the period from July 11, 1997 to January 2, 1998 was primarily attributable to the absence of significant interest expense, amortization expense and the write-off of purchased in-process research, development and engineering.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily from cash generated by our operations. We have financed our acquisitions, including the July 1997 leveraged buyout, through a combination of borrowings and private sales of our common stock. Net proceeds from financing activities from January 1, 1997 through March 31, 2000 included:
- In connection with the LBO, in July 1997 we issued $25.0 million principal amount of 13% senior subordinated notes, entered into a $10.0 million revolving line of credit and incurred $50.0 million of senior Term A and Term B loans. Net proceeds from these borrowings totaled $71.8 million. We also received a $45.3 million equity investment from DLJ Merchant Banking, various members of our senior management and other investors.
- In connection with our August 1998 acquisition of Hittman, we borrowed an additional $60.0 million of Term A and Term B loans and increased our revolving line of credit up to a maximum of $20.0 million. We also received a $16.5 million equity investment from DLJ Merchant Banking, various members of our senior management and other investors.
As of May 1, 2000, there was $25.0 million principal amount outstanding under our 13% senior subordinated notes, $45.0 million outstanding under the Term A loan facility and $59.1 million outstanding under the Term B loan facility. As of May 1, 2000, the interest rate for our Term A loans was 9.63% and the interest rate for our Term B loans was 9.97%.
Our revolving line of credit is with the same lending syndicate that provided financing for the Hittman transaction and allows us to borrow up to $13.0 million. If we meet our financial targets, including the debt to EBITDA ratio set forth in our credit agreement, the maximum availability will increase after December 31, 2000 to $20.0 million. The line of credit bears interest at prime plus 2.25% or LIBOR plus 3.5%, at our option, and expires on September 30, 2004. As of May 1, 2000, $1.8 million was outstanding under this line of credit and the effective rate was 11.25%. The line of credit is secured by our accounts receivable and inventories and requires us to comply with various quarterly financial covenants, including covenants related to EBITDA and ratios of leverage, interest and fixed charges as they relate to EBITDA. We have failed to fully comply with the financial covenants required by our line of credit. In November 1999, we entered into a waiver and amendment with our lenders which, among other things, waived our non-compliance with financial covenants contained in the credit agreement. In February 2000, our credit agreement was again amended to change provisions governing the applicable interest rates and financial covenants. At May 1, 2000, we were in full compliance with the financial covenants under the line of credit.
In August 1998, we sold the assets of one of our product lines, Greatbatch Scientific, to a third party in exchange for stock of that company valued at $2.4 million. Our 1998 results reflect revenues of $0.1 million and an operating loss of $1.3 million from Greatbatch Scientific's operations. In 1997, when we accounted for Greatbatch Scientific as a business development program, our total costs were $3.2 million.
As of March 31, 2000, we had cash and cash equivalents of $2.5 million. We have historically generated positive cash flow from operations. Cash generated by operating activities was $6.9 million in 1999 and $8.9 million in 1998 and cash used in operating activities was $0.6 million in 1997. Cash generated by operating activities in 1999 was positively impacted by lower incentive compensation payments and interest payments compared to payments made in 1998. Cash generated by operating
29 activities in 1998 was negatively impacted by an increase in accounts receivable in 1998, almost completely offset by higher incentive compensation and interest accruals in 1998 versus 1997.
Cash used in investing activities was $8.8 million, $83.4 million and $5.6 million in 1999, 1998 and 1997, respectively. The large increase in 1998 was attributable to our acquisition of Hittman. Capital expenditures were $8.5 million, $6.2 million and $4.6 million in 1999, 1998 and 1997, respectively.
Cash provided by financing activities was $1.7 million, $76.3 million and $6.9 million in 1999, 1998 and 1997, respectively. The increases and decreases in net cash provided by financing activities during these periods were attributable to our acquisition of Hittman.
We expect to incur capital expenditures of approximately $6.6 million in 2000, $2.0 million of which we anticipate will be used for continued development of our capacitor product line and $4.6 million of which we anticipate will be used for routine recurring capital expense obligations. As of May 1, 2000, we had incurred $2.6 million of capital expenditures in 2000. We intend to use the proceeds of this offering to repay part of our outstanding indebtedness, including all of our 13% senior subordinated notes and a portion of our Term A and Term B loans. Although it is difficult for us to predict future liquidity requirements, we believe that our existing cash balances and cash equivalents and cash from operations will be sufficient to finance our operations and planned capital expenditures for the next two years. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek additional funds through public or private equity or debt financing or from other sources. There can be no assurance that additional financing will be available to us or, if available, that it can be obtained on a timely basis or on terms acceptable to us.
INFLATION
We do not believe that inflation has had a significant effect on our operations to date.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is to changing interest rates. Our policy is to manage interest rates through a combination of variable rate debt and through use of interest rate cap agreements to manage our exposure to fluctuations in interest rates. As of May 1, 2000, substantially all of our long-term debt consisted of variable rate instruments that accrue interest at floating rates. As of May 1, 2000, through interest rate cap agreements, we had capped our interest rate exposure at 7.0% on $24.1 million of floating rate debt through December 2000 and at 6.0% on $55.0 million of floating rate debt through January 2002. We do not use foreign currency forward contracts and do not have any material foreign currency exposure. In order to minimize our foreign exchange risk, all of our sales are made in U.S. dollars. We do not hedge against price fluctuation in the commodities used in the manufacturing of our products. We will reevaluate this policy as needed commensurate with the risks inherent in our business.
NEW ACCOUNTING PRONOUNCEMENTS
In 1999, we adopted AICPA Statement of Position 98-5, "Reporting the Costs of Start-Up Activities," an accounting standard which required that organization and other start-up costs that we capitalized prior to January 2, 1999 be written off and any future start-up costs be expensed as incurred. In accordance with this statement, in 1999 we wrote off $0.6 million, net of tax, of start-up costs that had been deferred in conjunction with the July 1997 leveraged buyout and our acquisition of Hittman's assets and liabilities in August 1998.
In 2001, we plan to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities." This standard will require us to recognize all derivative financial instruments on our balance sheet at fair value with changes in fair value recorded to the statement of operations or comprehensive income, depending on the nature of the investment. Because our interest rate cap agreements are our only derivative financial instruments, we do not expect the adoption of the standard to have a material effect on our financial statements.
30 BUSINESS
OVERVIEW
We are the leading developer and manufacturer of power sources and other components used in implantable medical devices, including wet tantalum capacitors and precision components, and a preferred supplier of power sources and components. We offer the most advanced, most reliable and longest lasting products commercially available for implantable medical devices and enable our customers to introduce implantable medical devices that are progressively smaller, longer lasting, more efficient and more functional. We leverage our core competencies in technology and manufacturing to develop and produce power sources for commercial applications that demand high performance and reliability, including aerospace, oil and gas exploration and oceanographic equipment. Our customers utilize our specially designed, proprietary power sources and components in their products. We believe that our proprietary technology, close customer relationships, market leadership and dedication to quality provide us with significant competitive advantages over our competitors and create a barrier to entry for potential market entrants.
Mr. Wilson Greatbatch patented the implantable pacemaker in 1962. In 1970, Mr. Greatbatch founded Wilson Greatbatch Ltd., our predecessor. In July 1997, DLJ Merchant Banking led a leveraged buyout of Wilson Greatbatch Ltd. Our company was incorporated in connection with the 1997 leveraged buyout to acquire Wilson Greatbatch Ltd., which is now our wholly-owned subsidiary. We acquired Hittman in August 1998 to expand and complement our product lines. In August 1998, we also sold the assets of our Greatbatch Scientific product line to focus on the newly-acquired Hittman product lines.
IMPLANTABLE MEDICAL DEVICE INDUSTRY
OVERVIEW
The following table sets forth the main categories of battery-powered implantable medical devices and the principal illness or symptom treated by each device:
DEVICE PRINCIPAL ILLNESS OR SYMPTOM ------Pacemakers...... Abnormally slow heartbeat ICDs...... Rapid and irregular heartbeat Left ventricular assist devices...... Heart failure Hearing assist devices...... Hearing loss Neurostimulators...... Tremors or chronic pain Drug pumps...... Diabetes or chronic pain
The implantable medical device industry is expected to grow primarily as a result of:
- advances in medical technology that will allow physicians to use implantable medical devices as a substitute for, or in conjunction with, prescription drugs, to treat a wider range of heart diseases, such as atrial fibrillation and congestive heart failure;
- increased use of recently developed implantable medical devices, including left ventricular assist devices, hearing assist devices, neurostimulators and drug pumps;
- expansion of indications, or uses, for implantable medical devices;
- the aging population, which is expected to require an increasing number of pacemakers, ICDs and other implantable medical devices;
31 - a combination of smaller, lighter, more efficient and more functional devices and longer-lasting power sources which will be easier for physicians to implant and will be less intrusive to recipients; and
- increased market penetration beyond the United States and other developed countries.
Medical Data International, an independent industry publisher, estimates that revenues from pacemakers sold worldwide will increase from $2.6 billion in 1999 to $3.6 billion in 2004, representing a compound annual growth rate of 6.7%. Medical Data International also estimates that revenues from ICDs sold worldwide will increase from $1.5 billion in 1999 to $5.5 billion in 2004, representing a compound annual growth rate of 29.7%. The faster growth predicted for the ICD market is predicated on anticipated new applications for, and greater acceptance of, ICDs and an increased penetration of the ICD market.
MARKET OPPORTUNITY
The market for our power sources and components benefits directly from the growth of the implantable medical device industry. Manufacturers are dependent on advances in power sources and component technology to make their devices smaller, longer lasting, more efficient and more functional. In addition, manufacturers of implantable medical devices must be approved by the FDA, and have significant exposure to product liability claims and damages. To minimize risk and facilitate the FDA approval process, which can be lengthy, manufacturers of implantable medical devices generally require the highest quality, most reliable power sources and components available from proven suppliers. As a result, manufacturers generally enter into long term contracts with their suppliers and often collaborate with them on power source and component development. We believe that our proprietary technology, close customer relationships, market leadership and dedication to quality provide us with significant competitive advantages over our competitors and create a barrier to entry for potential market entrants.
STRATEGY
Our objective is to enhance our position as the leading developer and manufacturer of power sources and other components for implantable medical devices. We intend to:
- EXPAND OUR PROPRIETARY TECHNOLOGY PORTFOLIO THROUGH CONTINUOUS TECHNOLOGICAL INNOVATION AND CONTINUE TO FOCUS OUR RESEARCH, DEVELOPMENT AND ENGINEERING EFFORTS ON PIONEERING POWER SOURCES AND ADVANCED COMPONENTS FOR IMPLANTABLE MEDICAL DEVICES. We commit substantial resources to research, development and engineering and believe that this commitment has enabled us to be at the forefront of the new technologies that are expected to drive the growth of the implantable medical device market in the foreseeable future. In 1999, we introduced a line of capacitors utilizing proprietary wet tantalum technology. Our innovative use of this technology enables us to produce capacitors that are significantly smaller than those currently used and offer improved electrical performance. We believe that our focus on technology has led to strong relationships with our customers and provides us significant advantages in maintaining our continued leadership within our markets.
- ENHANCE OUR POSITION AS AN INTEGRATED COMPONENT SUPPLIER TO THE IMPLANTABLE MEDICAL DEVICE INDUSTRY BY BROADENING OUR PRODUCT LINE TO INCLUDE A MORE COMPREHENSIVE RANGE OF POWER SOURCES AND COMPONENTS. We believe that there is a significant opportunity to provide our customers with substantially all of the key components for their products, other than microelectronics. Our position as a leading manufacturer of implantable medical device components allows us to provide a broader range of product components than any of our competitors. As a result of our 1998 acquisition of Hittman and the internal expansion of our components business, we are able to provide a major implantable medical device manufacturer with most of the components used
32 in its pacemakers. We intend to continue to expand our product line. We believe that our customers value the benefits of a stable, reliable, quality-driven supplier which is able to provide a broad range of components to meet their product requirements.
- CONTINUE TO COLLABORATE WITH OUR CUSTOMERS TO JOINTLY DEVELOP NEW TECHNOLOGIES THAT ENABLE THEM TO DEVELOP AND MARKET INCREASINGLY MORE EFFECTIVE AND TECHNOLOGICALLY INNOVATIVE PRODUCTS. Our close relationships with our customers gives us significant advantages in anticipating and meeting their requirements and needs. We intend to continue to work closely with our customers to develop innovative medical devices that utilize our specially designed, proprietary power sources and components. We are currently collaborating with two leading manufacturers of ICDs to incorporate customized configurations of our new capacitors into their most advanced product programs. We believe that by integrating our development efforts with those of our customers, we can continue to create innovative and technologically superior products and strengthen our position as a single source supplier.
- ENTER INTO STRATEGIC ALLIANCES AND MAKE SELECTIVE ACQUISITIONS THAT COMPLEMENT OUR CORE COMPETENCIES IN TECHNOLOGY AND MANUFACTURING FOR BOTH IMPLANTABLE MEDICAL DEVICES AND OTHER DEMANDING COMMERCIAL APPLICATIONS. We regularly review strategic opportunities to acquire or license technologies. Through our 1998 acquisition of Hittman, we added two key component technologies, feedthroughs and electrodes, to our product offerings. We are currently working with strategic partners to develop rechargeable battery systems and technology for automatic external defibrillators. We believe that strategic alliances and selective acquisitions will enable us to accelerate the development of new technologies and grow our leading market share position.
33 PRODUCTS
We design and manufacture a variety of power sources, capacitors and components, such as feedthroughs, electrodes and precision components for implantable medical devices. Our technology is also used in a number of demanding commercial applications, including aerospace, oil and gas exploration and oceanographic equipment. The following table provides information about our principal products:
PRODUCT DESCRIPTION USED IN PRINCIPAL PRODUCT ATTRIBUTES ------MEDICAL:
Implantable power sources Batteries for implantable Pacemakers, - High reliability and medical devices ICDs, predictability left ventricular - Long service life assist devices, - Customized configuration neurostimulators, - Light weight drug pumps and - Compact and less intrusive hearing assist devices
Capacitors Store energy generated by a ICDs - Stores more energy per unit battery before delivery to the volume (energy density) than heart other existing technologies - Customized configuration
Medical components:
Feedthroughs Allow electrical signals to be Pacemakers, - Ceramic to metal seal is brought from inside an ICDs, substantially more durable implantable medical device to left ventricular than traditional seals an electrode assist devices, - Multifunctional neurostimulators, drug pumps and hearing assist devices
Electrodes Deliver electrical signal from Pacemakers - High quality coated surface the feedthrough to a body part ICDs - Flexible in utilizing any undergoing stimulation combination of biocompatible coating surfaces - Customized offering of surfaces and tips
Precision components Machined and molded parts for Pacemakers - High-level of manufacturing implantable medical devices ICDs precision Drug pumps - Broad manufacturing flexibility
COMMERCIAL:
Commercial power sources Batteries for demanding Aerospace, oil and - Long-life dependability commercial applications gas exploration and - Highest energy density and oceanographic highest quality power equipment sources commercially available
IMPLANTABLE POWER SOURCES
The power sources that we produce are batteries. A battery is an electrochemical device that stores energy and releases it in the form of electricity. To generate an electrical current, electrons are first released from one part of the battery, called the anode or negative electrode. This flow of electrons, known as a current, travels to a load or device outside the battery. After powering the device, the electron flow reenters another part of the battery, called the cathode or positive electrode. As electrons flow from the anode to the device being powered by the battery, ions released from the anode cross through an electrolyte, which consists of one or more chemical compounds that facilitate the flow of ions to the cathode. The ions react with the cathode in order to complete the circuit. Separators are typically used inside the battery as electrical insulators to divide the anode and the cathode to prevent mechanical contact between them, which would result in the rapid depletion of the battery cell.
34 The following diagram illustrates the battery process described in the paragraph above:
[BATTERY PROCESS DIAGRAM]
From the late 1950s to the early 1970s, implantable medical devices, such as pacemakers, were powered by zinc/mercuric oxide batteries. These batteries typically lasted two to three years, often failed without warning, were large and bulky and generated hydrogen gas, making it impossible to seal the battery. In the early 1970s, we introduced lithium/iodine batteries as power sources for pacemakers. Our lithium batteries are now the principal power source for pacemakers. Pacemaker batteries utilizing our technology last approximately six years and provide high reliability and predictability. In the mid 1980s, we introduced lithium/silver vanadium batteries for powering ICDs. These batteries provide the higher power levels required by an ICD with a high degree of reliability and at least a five year battery life. Our lithium/silver vanadium oxide batteries have become the principal power source of ICDs.
In 1996, we introduced a lighter weight titanium-encased lithium/carbon monofluoride battery as the next generation pacemaker battery. These batteries offer improved pacemaker performance in several areas, including:
- pacemaker weight reduction of up to 25%;
- improved electrical performance, which is more suitable for use with the latest pacemaker microelectronics; and
- 10-15% longer battery life than comparable products.
In 1996, we introduced a new process for cathode manufacturing that enabled the production of significantly thinner cathodes than previously possible. As a result of this new cathode manufacturing process and other design improvements, our newest generation of ICD batteries is the thinnest commercially available and is up to 50% thinner than many existing models. Over the past few years,
35 the decrease in battery size has contributed significantly to decreases in the size of ICDs, making these devices easier to implant.
CAPACITORS
Capacitors, which are used in ICDs, perform the critical function of storing electrical pulses before delivery to the heart. An ICD typically has two capacitors. Historically, ICDs utilized aluminum-based capacitors. In the fourth quarter of 1999, we introduced wet tantalum hybrid capacitors commercially for use in ICDs, which provide a number of advantages over aluminum-based capacitors. Our wet tantalum hybrid capacitors, which combine liquid electrolytes and ruthenium oxide cathode material with a tantalum anode component, provide a unique combination of high voltage and high energy storage capacity. This combination enables energy density not achievable with competing technologies. Our capacitors can be manufactured in many sizes and shapes to meet the specific needs of our customers.
To produce our capacitors, we have licensed wet tantalum technology from the Evans Capacitor Company. We are the exclusive licensee for implantable medical applications of this technology. We have also developed our own portfolio of patents and patent applications covering improvements that we have made to Evans' capacitor technology. In 1997, we entered into an agreement with a major ICD manufacturer to use our capacitor technology in their next generation of ICDs. We currently supply all of the capacitors used in the new generation of ICDs manufactured by this customer. In addition, a second major manufacturer has signed a development agreement with us for the design of a proprietary ICD capacitor.
MEDICAL COMPONENTS
We manufacture feedthroughs, electrodes and other precision components that are utilized in implantable medical devices. Feedthroughs and electrodes are critical components of these devices that deliver electrical energy to the heart.
FEEDTHROUGHS. Feedthroughs are components that transmit electrical signals from inside an implantable medical device to the electrodes that transmit the signals to the body. Feedthroughs consist of an outer metallic structure called a flange, an electrical insulator made of ceramic or glass material, and wire connectors called poles that carry electrical signals from within the device. Our feedthroughs use a ceramic to metal seal that is substantially more durable than a traditional glass to metal seal. We also manufacture a feedthrough that includes a filtering capacitor that can filter out electromagnetic interference, such as signals from other implantable medical devices or cellular phones.
We design and manufacture 35 types of feedthroughs. Each of our feedthroughs is designed specifically for a particular customer device. We are often the sole source of feedthroughs for our customers. In 1999, approximately 95% of our feedthroughs were used in pacemakers and ICDs, with the balance used primarily in left ventricular assist devices, hearing assist devices, drug pumps and neurostimulators. We are currently working with a number of medical device manufacturers to develop hermetic feedthroughs for the next generation of implantable medical devices and applications, including neurostimulators, middle ear devices, oxygen sensors and muscle stimulation devices.
ELECTRODES. Electrodes are components used in pacemakers and ICDs that deliver the electrical signal from the feedthrough to the heart to restore its normal rhythm. By coating the electrode with chemical compounds, we can enhance its electrical properties and therefore better deliver energy to the heart. Some electrode tips are designed to contain medication, such as steroids, to prevent scarring of the heart tissue following electrode implantation.
We design and manufacture a variety of coated electrodes, some of which have tips that can contain medication. We believe that our experience with physical deposition processes, such as
36 sputtering and powder metallurgic techniques, has enabled us to produce high quality coated surfaces utilizing almost any combination of biocompatible coating surfaces. We believe that our coating technology can also be applied to future generation cardiovascular and non- cardiovascular implantable medical products, such as vascular stents, which are cynlindrical scaffolds used in cardiology procedures to help keep arteries open.
PRECISION COMPONENTS. We design and manufacture miniature precision components and subassemblies primarily for pacemaker and ICD manufacturers. Our precision components are machined or molded to adhere to tolerances up to one ten-thousandth of an inch. To manufacture precision components, we typically use various alloys of stainless steel, platinum, titanium, aluminum and brass, as well as plastics and composites. We also are the exclusive supplier of a critical drug pump subassembly for a manufacturer of implantable drug pumps. Although our primary focus is to develop and manufacture precision components for implantable medical devices, we also serve the general medical equipment market and the aerospace, oil and gas exploration and oceanographic industries.
COMMERCIAL POWER SOURCES
We have developed specialized power source technologies that are functional in high temperatures or under high shock and vibration. The majority of the commercial power sources that we sell are used in oil and gas exploration, including recovery equipment, pipeline inspection gauges, down-hole pressure measurement systems and seismic surveying equipment. We also supply power sources to NASA for its space shuttle program. In addition, our commercial power sources have been used for emergency position locating beacons and locator transmitters, classified governmental uses, electronic circuit breakers for industrial applications, weather balloon instrumentation, electricity transmission cable lighting detectors, wear monitors for train cables and scientific equipment used in Antarctica.
PRODUCT LINES UNDER DEVELOPMENT
RECHARGEABLE LITHIUM ION BATTERIES. We are currently developing a line of rechargeable lithium ion batteries that is expected to broaden and complement our current lines of lithium batteries. A number of new medical devices require rechargeable batteries, including:
- LEFT VENTRICULAR ASSIST DEVICES that are being developed to treat heart failure use external and internal batteries as power sources, both of which must be rechargeable. We are developing lithium ion rechargeable technology to produce lighter batteries with increased power and longer life.
- IMPLANTABLE HEARING ASSIST DEVICES that are used to treat patients who cannot use conventional hearing aids. These batteries are compact and are capable of providing low levels of current with infrequent recharging.
- NEUROSTIMULATORS AND DRUG PUMPS that are used for indications such as tremors, diabetes and chronic pain. Since these devices are sometimes implanted in young patients, the use of our rechargeable battery technology with extended device life should reduce the number of replacement implants needed throughout the life of the patient.
IMPLANTABLE PUMP TECHNOLOGY. We have developed proprietary technology that has applications in implantable devices that are designed to deliver small quantities of drugs or other fluids to a patient. Several of our technologies are critical to these devices, including the power source, the feedthroughs and the pumping mechanism that moves the fluid. Currently, one of our customers is seeking regulatory approval in Europe for a device that utilizes our implantable pump technology.
37 RESEARCH, DEVELOPMENT AND ENGINEERING
Our position as the leading developer and manufacturer of power sources for implantable medical devices is largely the result of our long history of technological innovation. We invest substantial resources in research, development and engineering. Our scientists, engineers and technicians focus on improving existing products, expanding the use of our products and developing new products. In addition to our internal technology and product development efforts, we maintain close relationships with leading research organizations, including Alfred University, Clarkson University, the Jet Propulsion Laboratory, the applied physics department of Johns Hopkins University, NASA, Sandia-National Laboratories, the State University of New York at Buffalo and Villanova University. These relationships include funding research efforts, licensing researchers' technology and assisting in building prototypes. Our research, development and engineering team is responsible for a number of pioneering developments in the implantable medical device industry including:
YEAR COMMERCIAL INTRODUCTION INDUSTRY IMPACT ------1972 First lithium anode battery Industry standard for pacemakers
1974 First ceramic-to-metal seal for Industry standard for sealing of implantable devices devices
1980 First oxyhalide/interhalogen Enabled commercial batteries to batteries perform at lower temperatures with very high energy density
1981 First implantable pump capable of Enabled implantable drug delivery passing bubbles system
1987 First implantable lithium/silver Enabled commercial viability of ICDs vanadium oxide battery
1996 First titanium-encased lithium/carbon Enabled weight reduction and monofluoride pacemaker batteries improved electrical performance for advanced microelectronics
1999 First wet tantalum capacitors Enabled smaller sizes of ICDs and increased design flexibility
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our proprietary rights to our technologies and products. To date, we have been granted 125 U.S. patents and 196 foreign patents. We also have 132 U.S. and 125 foreign pending patent applications at various stages of approval. During the past three years, we have received 39 new U.S. patents, of which 13 were received in 1999. Corresponding foreign patents have been issued or are expected to be issued in the near future. Often, a single product is protected by several patents covering various aspects of the design. We believe this provides broad protection of the concepts employed.
38 The following table provides a breakdown of our patents by product type:
NUMBER OF NUMBER OF PRODUCT PATENTS GRANTED ACTIVE PATENTS ------Batteries--Pacemakers...... 164 24 Batteries--ICDs...... 78 68 Capacitors...... 3 3 Feedthroughs...... 2 2 Pumps...... 8 8 Batteries--Commercial...... 11 11 Batteries--Rechargeable...... 2 2 Batteries--Lithium/carbon monofluoride...... 5 5 Other products...... 48 14 ------Total...... 321 137 ======
The following table sets forth the expiration dates of our material patents:
DESCRIPTION OF PATENT EXPIRATION DATE ------Anode assembly for lithium-halogen cell...... January 2001 Lithium-halogen cell...... January 2001 Anode assembly for lithium-halogen cell...... January 2001 Defibrillator cell design...... May 2006 Defibrillator cell design...... May 2006 Serpentine electrode design for prismatic cell...... May 2011 Butterfly electrode assembly...... September 2011 Butterfly electrode assembly...... September 2011 Multiplate electrode design connected by bridge...... September 2011 Insulating upper bag for increased cell reliability...... May 2012 Halogenated polymer fiber separator for electrochemical cell...... October 2013 Sheet cathode...... November 2013 Sheet cathode...... November 2013 High shock and vibration resistant cell design...... February 2015 Aqueous blended electrode material...... March 2015 Carbonate electrolyte additives for defibrillator cells..... March 2015 Separator insert for oxyhalide cell...... February 2016 Dual connection tab current collector for carbon monofluoride cells...... July 2016 Hermetic seal using a single close ball...... October 2016 Improved electrolyte/cathode ratio for carbon monofluoride cells...... November 2016 Ultrasonically coated substrate for use in a capacitor and method of manufacture...... May 2017 Hermetically sealed wet tantalum capacitor...... May 2017 Separator for use in carbon monofluoride cells...... June 2017 Electrode edge design for increased energy density for carbon monofluoride cells...... August 2017 Insulating upper bag for increased cell reliability...... April 2018
In addition, we are also a party to several license agreements with third parties pursuant to which we have obtained, on varying terms, the exclusive or non-exclusive rights to patents held by third parties. We have also granted rights in our own patents to others under license agreements.
39 We license the basic capacitor technology used in our defibrillator capacitors from Evans Capacitor Company. The license extends throughout the lives of the related patents, which expire in 2010, 2013 and 2014. The license can be cancelled if we default under the license agreement and fail to cure the default. A cancellation of the license would seriously impair our ability to produce our entire line of capacitors.
We license the anode technology we use in our rechargeable lithium ion batteries from AT&T. The license extends throughout the lives of the related patents, which expire in 2000 and 2002. The license can be cancelled if we default under the license agreement and fail to cure the default. A cancellation of the license may impair our ability to produce our entire line of rechargeable lithium ion batteries.
It is our policy to require our executive and technical employees, consultants and other parties to execute confidentiality agreements. These agreements prohibit disclosure of confidential information to third parties except in specified circumstances. In the case of employees and consultants, the agreements generally provide that all confidential information relating to our business is the exclusive property of our company.
MANUFACTURING AND QUALITY CONTROL
Our principal manufacturing facilities are in Clarence, New York, Cheektowaga, New York and Columbia, Maryland. Our three New York manufacturing facilities produce implantable power sources, capacitors, commercial power sources and components. Our Columbia, Maryland facility produces feedthroughs, electrodes and other components. We test our implantable power sources at our Wheatfield, New York facility.
During the past two years, we have modernized our facilities and a number of our manufacturing lines, processes and equipment. These manufacturing improvements have enabled us to increase the quality and service life of our power sources and other components and increase our manufacturing capacity. Key resources that allow us to manufacture subassemblies include a full model shop, a precious metals machining area, injection molding equipment and a Class 10,000 clean room.
We primarily manufacture small lot sizes, as most customer orders range from a few hundred to thousands of units. As a result, our ability to remain flexible is an important factor in maintaining high levels of productivity. Each of our production teams receives assistance from a manufacturing support team, which typically consists of representatives from our quality control, engineering, manufacturing, materials and procurement departments.
Our quality system is based upon an ISO documentation system and is driven by a master validation plan that requires rigorous testing and validation of all new processes or process changes that directly impact our products. Our New York facilities are ISO-9001 certified, which requires compliance with regulations regarding quality systems of product design, supplier control, manufacturing processes and management review. This certification can only be achieved after completion of an audit conducted by an independent authority. Our New York facilities are audited by the British Standards Institute and are also certified by the British Standards Institute to the more rigorous EN-46001 standard that is usually reserved for manufacturers of medical devices. Our Columbia, Maryland facility is ISO-9002 certified and is audited by TUV Rheinland of North America, an independent auditing firm that specializes in evaluating ISO quality standards. To maintain certification, all facilities must be reexamined every six months by their respective certifying bodies.
SALES AND MARKETING
We utilize a combination of direct and indirect sales methods, depending on the particular product. In 1999, approximately 73% of our products were sold in the United States.
40 We market and sell our implantable power sources and capacitors directly to manufacturers of implantable medical devices. The majority of our implantable power source customers contract with us to develop custom batteries or capacitors to fit their specific product specifications. As a result, we have established close working relationships between our internal program managers and our customers. We market our power source products and technologies at industry meetings and trade shows, including CardioStim and North American Society of Pacing and Electrophysiology or NASPE.
We sell feedthroughs, electrodes and other precision components directly to manufacturers. Two internal sales managers support all activity, and involve engineers and materials professionals in the sales process to appropriately address customer requests. As in the implantable power source and capacitor sales process, we have established relationships directly with leading manufacturers of implantable medical devices. We market our precision components, feedthroughs and electrodes by participating in the annual Medical Design and Manufacturing trade show and by producing printed and electronic marketing materials for distribution to prospective customers.
We sell our commercial power sources either directly to the end user, directly to manufacturers that incorporate our products into other devices for resale, or to distributors who sell our products to manufacturers and end users. Our sales managers are trained to assist our customers in selecting appropriate battery chemistries and configurations. We market our commercial power sources at various technical trade meetings, including the annual Petroleum Offshore Technology Conference and Offshore Europe. We also place print advertisements in relevant trade publications.
Firm backlog orders at December 31, 1999 and 1998 were $16.2 million and $24.6 million, respectively. Most of these orders were expected to be shipped within one year. As more of our customers move to "just in time" manufacturing systems, the amount of firm orders placed for delivery for more than a three or four month period has declined in recent years. This is a significant reason for the 34% reduction in backlog between December 31, 1999 and 1998.
CUSTOMERS
Our products are designed to provide reliable, long lasting solutions that meet the evolving requirements and needs of our customers and the end users of their products. Our medical products customers include leading implantable medical device manufacturers such as Guidant, St. Jude Medical and Medtronic. In 1999, Guidant accounted for approximately 34% of our revenues and St. Jude Medical accounted for approximately 32% of our revenues. Our commercial products customers are primarily companies involved in the aerospace, oil and gas exploration and oceanographic industries.
In February 1999, we entered into a supply agreement with Guidant. Pursuant to the agreement, Guidant purchases batteries and components from us for use in its implantable medical devices. Our supply agreement with Guidant expires on December 31, 2001 and can be renewed for additional one year periods upon mutual agreement.
In April 1997, we entered into a supply agreement with St. Jude Medical. In accordance with this agreement, we are the primary supplier of many components used in their pacemakers and ICDs, except for microprocessors and capacitors. We will also be the exclusive supplier of batteries to St. Jude Medical through the expiration of the supply agreement on December 31, 2003.
In March 1976, we entered into a technology transfer agreement and license agreement with Medtronic. Our license agreement provides Medtronic with the nonexclusive right to use our proprietary technology to manufacture its own batteries. The license agreement allows Medtronic to manufacture lithium/iodine or lithium/halide batteries, but does not permit Medtronic to manufacture batteries using our new titanium lithium/carbon monofluoride technology. In accordance with the license agreement, Medtronic pays us a royalty for each battery used in each medical device that it sells. At the time we entered into the license agreement with Medtronic, there were a number of
41 competing battery technologies. Our management believed that licensing our proprietary technology to Medtronic, which was the industry leader at that time, would help make our technology the industry standard. Our license agreement does not terminate so long as Medtronic uses any of our patented technology. However, we do not expect to receive significant royalties from Medtronic after 2000.
In July 1991, we entered into a defibrillator battery supply agreement with Medtronic. In accordance with the agreement, we provide Medtronic with lithium/silver vanadium oxide batteries for their ICDs. Our supply agreement with Medtronic expires on July 31, 2001.
SUPPLIERS AND RAW MATERIALS
Lithium, iodine and metal cases are the most significant raw materials that we use to manufacture our batteries. In the past, we have not experienced any significant interruptions or delays in obtaining raw materials. We seek to minimize inventory levels, which provides us with a reduced risk of obsolescence. Minimizing our inventory levels also enables us to stock materials based on firm order requirements, rather than forecasts and anticipated sales. However, we maintain minimum safety stock levels of critical raw materials. We seek to improve our supply purchase pricing by using bulk purchases, precious metal pool buys and blanket orders and by entering into long term contracts. Annual minimum purchase levels under these contracts have historically been well below our expected annual usage, and therefore present little risk of liability.
We have long standing relationships with most of our significant suppliers and have conducted business with them for an average of 13 years. Our supply agreements typically have three year terms. Our significant suppliers of raw materials and components accounted for approximately 31% of our purchases in 1999. We believe that there are alternative suppliers or substitute products available for each of the materials we purchase, at competitive prices. Our material supply agreements may be terminated prior to their scheduled expiration dates if there is a material breach by us that remains uncured.
COMPETITION
We currently supply implantable power sources, capacitors, feedthroughs, electrodes and precision components to the implantable medical device market. Our existing or potential competitors include:
- leading implantable medical device manufacturers, such as Guidant, St. Jude Medical and Medtronic, which have vertically integrated operations or may become vertically integrated in the future; and
- smaller companies that concentrate on niche markets.
Medtronic produces power sources for use in implantable medical devices that it manufactures. However, to our knowledge Medtronic does not sell power sources to third parties. Our company and Medtronic are the two major manufacturers of power sources for implantable medical devices. We also compete in the intensely competitive commercial power source market. Our principal competitors in this market are Eagle- Picher Industries, ECO-Tracer and Battery Engineering. While we believe that the industry perceives our products to be of the highest quality, there are suppliers whose products are perceived to be of comparable quality. Moreover, the commercial power source market is subject to volatility in oil and gas exploration activity. When oil and gas exploration activity has slowed, a number of our competitors have historically reduced battery prices to maintain or gain market share. Quality and technology are the principal bases upon which we compete in both the implantable medical devices market and the commercial power sources market.
42 GOVERNMENT REGULATION
Our business is not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which we operate, including those federal, state and local environmental laws and regulations governing the emission, discharge, use, storage and disposal of hazardous materials and the remediation of contamination associated with the release of these materials at our facilities and at off-site disposal locations. Our research, development and engineering activities involve the controlled use of, and our products contain, small amounts of hazardous materials. Liabilities associated with hazardous material releases arise principally under the Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws which impose strict, joint and several liability on owners and operators of contaminated facilities and parties that arrange for the off-site disposal of hazardous materials. We are not aware of any material noncompliance with the environmental laws currently applicable to our business and we are not subject to any material claim for liability with respect to contamination at any company facility or any off-site location. We cannot assure you, however, that we will not be subject to such environmental liabilities in the future as a result of historic or current operations.
As a component manufacturer, we produce products that are not subject to FDA approval. However, the FDA and related state and foreign governmental agencies regulate many of our customers' products as medical devices. The FDA must approve those products prior to commercialization. In addition, because some of the products produced by our engineered components division may be considered finished medical devices, some of the operations within that division are subject to FDA inspection and assessment.
RECRUITING AND TRAINING
We dedicate significant resources to our recruiting efforts. Our internal recruiting efforts primarily focus on supplying quality personnel to our business. We also seek to meet our hiring needs through outside sources. We believe that a strong human resources and recruiting effort is necessary to expand our current employee base and maintain our high employee retention rates. We have established a number of programs that are designed to challenge and motivate our employees and we encourage our employees to be proactive in contributing ideas and regularly survey them to collect feedback on ways that our business and operations can be improved.
We provide an intensive training program to our new employees which is designed to educate them on safety, quality, our business strategy and the methodologies and technical competencies that are required for our business and our corporate culture. Our safety training programs focus on such areas as basic industrial safety practices and emergency response procedures to deal with fires or chemical spills. All of our employees are required to participate in a specialized training program that is designed to provide an understanding of our quality objectives. We also have formal, mandatory training for all of our employees in their core competencies on an annual basis. We offer our employees a tuition reimbursement program and encourage them to continue their education at local colleges. Many of our professionals attend seminars on topics that are related to our corporate objectives and strategies. We believe that comprehensive training is necessary to ensure that our employees work in a uniform and consistent manner and that best practices are effectively utilized.
EMPLOYEES
As of May 1, 2000, we had 750 employees, including 135 research, development and engineering personnel, 448 manufacturing personnel and 167 support personnel. We also employ a number of temporary employees to assist us with various projects and service functions. Our employees are not represented by any union and, except for executive officers of our company and our subsidiaries, are retained on an at-will basis. We believe that we have a good relationship with our employees.
43 PROPERTIES
Our executive offices are located in Clarence, New York. The building that houses our executive offices also contains warehouse operations, a variety of support services and capacity for light manufacturing or laboratory space.
The following table sets forth information about all of our principal manufacturing or testing facilities:
LOCATION SQ. FT. OWN/LEASE USE ------Clarence, NY...... 70,400 Own Battery manufacturing, development Clarence, NY(1)...... 20,800 Own Machining and assembly of components Clarence, NY(1)...... 18,550 Lease Machining and assembly of components Clarence, NY...... 45,305 Lease Offices and warehouse Wheatfield, NY...... 2,600 Lease Battery testing Cheektowaga, NY...... 19,900 Lease Capacitor manufacturing Columbia, MD...... 30,000 Lease Feedthroughs, electrodes and components manufacturing
(1) We own and rent space in part of the same facility.
We believe these facilities are adequate for our current and foreseeable purposes and that additional space will be available when needed.
LEGAL PROCEEDINGS
We are involved in various lawsuits and claims incidental to our business. In the opinion of our management, the ultimate liabilities, if any, resulting from these lawsuits and claims will not materially affect our financial position or results of operations.
44 MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our directors, executive officers and certain key employees, and their respective ages and positions as of May 1, 2000, are as follows:
NAME AGE POSITION ------Edward F. Voboril...... 57 President, Chief Executive Officer and Chairman of the Board
Larry T. DeAngelo...... 53 Vice President, Administration and Secretary
Curtis F. Holmes, Ph.D...... 57 President, Greatbatch-Hittman, Inc.
Arthur J. Lalonde...... 45 Vice President, Finance and Treasurer
Richard W. Mott...... 41 Group Vice President
Susan M. Bratton...... 43 General Manager, Electrochem Battery
Robert C. Rusin...... 42 Vice President, Corporate Quality
Esther S. Takeuchi, Ph.D...... 46 Vice President, Research and Development
David L. Jaffe...... 41 Director
Robert E. Rich, Jr...... 59 Director
Douglas E. Rogers...... 45 Director
Henry Wendt...... 66 Director
David M. Wittels...... 35 Director
EDWARD F. VOBORIL has served as President and Chief Executive Officer of our company and our predecessor since December 1990. Mr. Voboril became Chairman of our Board of Directors in July 1997. Mr. Voboril's career spans over 25 years in the medical device industry. Prior to joining our predecessor in 1990, Mr. Voboril was Vice President and General Manager of the Biomedical Division of PPG Industries. He was previously Vice President and General Manager of the Medical Electronics Division of Honeywell, which was acquired by PPG in 1986. Mr. Voboril currently serves on the board of directors of Analogic Corporation, an electronics company. Mr. Voboril served as President of the Health Care Industries Association of Western New York from July 1995 to July 1998 and currently serves as a member of the board of directors of the Health Industries Manufacturers Association, where he is a member of the executive committee and chairs the small company council.
LARRY T. DEANGELO has served as Vice President, Administration of our company and our predecessor since November 1991 and has served as our Secretary since July 1997. Prior to joining our predecessor, Mr. DeAngelo was the Director of International Human Resources of Rockwell International Corporation. Mr. DeAngelo is currently a member of the Payment and Health Care Delivery Committee of the Health Industry Manufacturers Association and chairman of the operating board for the Buffalo Hearing and Speech Center.
CURTIS F. HOLMES, PH.D. has served as President of our subsidiary, Greatbatch-Hittman, Inc., since January 2000. Dr. Holmes served as Senior Vice President and Chief Operating Officer of Greatbatch-Hittman, Inc. from July 1999 to December 1999 and as our Senior Vice President from January 1999 to July 1999. From November 1980 to January 1999, Dr. Holmes served as our Vice President, Technology.
ARTHUR J. LALONDE has served as our Vice President, Finance and Treasurer since July 1997 and previously served as the Controller of our predecessor from August 1988 to July 1997. Mr. Lalonde is a
45 Certified Public Accountant and a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants.
RICHARD W. MOTT has served as our Group Vice President since August 1998. Mr. Mott served as our Vice President, Batteries from July 1997 to August 1998 and previously served as the Vice President, Batteries of our predecessor from September 1993 to December 1996 and from November 1997 to July 1997. Mr. Mott also served as Vice President and General Manager of Greatbatch Scientific from December 1996 to August 1998.
SUSAN M. BRATTON has served as the General Manager, Electrochem Battery since July 1998 and previously served as the Director of Procurement for our company and our predecessor from June 1991 to July 1998. Ms. Bratton has held various positions with us since 1976.
ROBERT C. RUSIN has served as our Vice President, Corporate Quality since July 1999. From August 1998 to July 1999, Mr. Rusin served as President and Chief Operating Officer of BioVector, Inc. From January 1997 to August 1998, Mr. Rusin served as Director, Sales and Distribution, of Greatbatch Scientific and previously served as Director, Greatbatch Surgical Products for our predecessor from January 1995 to January 1997.
ESTHER S. TAKEUCHI, PH.D. has served as our Vice President, Research and Development since May 1999. Dr. Takeuchi served as our Director of Electrochemical Research from July 1997 to May 1999 and previously served as Director of Electrochemical Research of our predecessor from August 1991 to July 1997. The Electrochemical Society Inc. conferred the Battery Division Technology Award upon Dr. Takeuchi in 1995 and in 1998, the Western New York Section of the American Chemical Society presented Dr. Takeuchi with the 68th Jacob F. Schoellkopf Medal. Dr. Takeuchi was elected a Fellow of the American Institute for Medical and Biological Engineering in 1999.
DAVID L. JAFFE has served as a director since December 1999. Mr. Jaffe is a Managing Director of DLJ Merchant Banking, Inc. Mr. Jaffe joined DLJ Merchant Banking, Inc. in 1984 and became a Managing Director in 1995. Mr. Jaffe serves on the boards of directors of Brand Scaffold Services, Inc., Duane Reade Inc., Shoppers Drug Mart, Inc. and Target Media Partners.
ROBERT E. RICH, JR. has served as a director since July 1997. Mr. Rich has served as President of Rich Products Corporation, a frozen foods manufacturer, since 1978. Mr. Rich is a member of the board of directors of the Uniform Code Council and Grocery Manufacturers of America, Inc.
DOUGLAS E. ROGERS has served as a director since July 1997. Since January 1997, Mr. Rogers has served as Managing Director of Global Health Care Partners, a unit of DLJ Merchant Banking specializing in private equity investment in health care businesses worldwide. Mr. Rogers previously served as head of U.S. Investment Banking at Baring Brothers and as a Senior Vice President at Lehman Brothers. Mr. Rogers serves on the board of directors of Charles River Laboratories Corp. and Computerized Medical Systems, Inc.
HENRY WENDT has served as a director since July 1997. Since January 1997, Mr. Wendt has served as Chairman of Global Health Care Partners, a unit of DLJ Merchant Banking specializing in private equity investment in healthcare businesses worldwide. Mr. Wendt retired as Chairman of SmithKline Beecham p.l.c. in 1994 after completing a career of nearly 40 years in the pharmaceutical, healthcare products and services industries. Mr. Wendt is Chairman of the Board of Computerized Medical Systems, Inc., and serves on the board of directors of Charles River Laboratories Corp., The Egypt Investment Company and West Marine, Inc., and also is a Trustee of the Trilateral Commission and Trustee Emeritus of the American Enterprise Institute.
DAVID M. WITTELS has served as a director since July 1997. Mr. Wittels has been a Principal of DLJ Merchant Banking, Inc. since January 1997. For the past five years, Mr. Wittels has held various
46 positions with DLJ Merchant Banking, Inc. He serves on the boards of AKI Holding Corp., AKI Inc., Mueller Holdings (N.A.), Inc. and Ziff Davis Holdings, Inc.
In accordance with the stockholders agreements described below, all of the parties to the stockholders agreements have agreed to cause our Chief Executive Officer, presently Mr. Voboril, to be a member of our Board of Directors. DLJ Merchant Banking nominated Messrs. Jaffe, Rich, Rogers, Wendt and Wittels to be directors.
BOARD OF DIRECTORS
Our directors are elected annually to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified. Our Board of Directors elects our executive officers annually to serve until the next annual meeting of the Board of Directors, or until their successors are duly elected and qualified, or until their earlier death, resignation, disqualification or removal from office.
BOARD COMMITTEES
Our Board of Directors has established a Compensation Committee, which consists of Messrs. Voboril, Wendt and Wittels. The Compensation Committee makes recommendations to the Board of Directors with respect to our general and specific compensation policies and administers our 1997 and 1998 stock option plans.
The Board of Directors has established an Audit Committee, which consists of Messrs. Rogers, Rich and Jaffe. The Board of Directors intends to name two additional independent directors to the Audit Committee after consummation of this offering. The Audit Committee reviews and reports to the Board of Directors on the scope and results of audits by our independent auditors and recommends a firm of certified independent public accountants to serve as our independent auditors, subject to nomination by the Board of Directors and approval by the stockholders. The Audit Committee also authorizes all audit and other professional services rendered by our independent auditors and periodically reviews the independence of the auditors. Membership on the Audit Committee is restricted to directors who are independent of management and free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment as a committee member.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, our Compensation Committee consisted of Messrs. Voboril, Wendt and Wittels and Lawrence A. Maciariello, a former director. Mr. Voboril served as our President, Chief Executive Officer and Chairman of the Board during 1999. In November 1997, we issued a loan to Mr. Voboril in the amount of $570,000, which matures on November 1, 2007, in connection with his purchase of shares of our common stock. Mr. Wittels is a Principal of DLJ Merchant Banking, Inc. and from June 1997 to July 1997, prior to our acquisition of Wilson Greatbatch Ltd., he served as our President.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for service as directors but are reimbursed for travel expenses and other out-of-pocket costs incurred in connection with their attendance at meetings.
47 EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for the year ended December 31, 1999 earned by our President, Chief Executive Officer and Chairman, and our four other most highly compensated executive officers as of December 31, 1999. In this prospectus, we refer to these individuals as our named executive officers.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------ANNUAL COMPENSATION AWARDS PAYOUTS ------OTHER SECURITIES ANNUAL UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2) OPTIONS PAYOUTS(3) COMPENSATION(4) ------Edward F. Voboril...... $ 271,500 $253,078 $ -- 68,233 $ -- $ 23,297 President, Chief Executive Officer and Chairman
Larry T. DeAngelo...... 128,571 36,924 -- 10,811 179,410 18,435 Vice President, Administration and Secretary
Curtis F. Holmes, Ph.D...... 147,166 38,373 37,967 14,892 184,050 185,655 President, Greatbatch-Hittman, Inc.
Richard W. Mott...... 138,332 39,740 -- 14,759 179,410 18,652 Group Vice President
Fred Hittman...... 193,569 -- -- 2,111 -- 3,370 Former President, Greatbatch-Hittman, Inc. (5)
(1) Represents payments we made in fiscal 1999 for bonuses earned in prior years.
(2) Includes reimbursement of $31,397 of relocation expenses for Dr. Holmes. No other annual compensation is reported for Mr. Voboril, Mr. DeAngelo, Mr. Mott or Mr. Hittman because perquisites and personal benefits did not exceed the lesser of $50,000 and 10% of the total annual salary and bonus reported for these named executive officers.
(3) Represents payments we made in fiscal 1999 pursuant to our long term compensation plan, which was terminated in 1997. The final payment under the plan will be payable in 2001.
(4) Represents payments of term life insurance premiums of $3,497 for Mr. Voboril, $1,134 for Mr. DeAngelo and $1,761 for Dr. Holmes; our matching contributions to the 401(k) plan of $3,360 for Mr. Voboril, $2,744 for Mr. DeAngelo, $3,360 for Dr. Holmes, $2,923 for Mr. Mott and $3,370 for Mr. Hittman; our contributions under the ESOP plan of $8,440 for Mr. Voboril, $7,847 for Mr. DeAngelo, $8,147 for Dr. Holmes and $8,479 for Mr. Mott, which contributions represent 938, 872, 905 and 942 shares of our common stock, respectively; our contributions under our defined contribution pension plan of $8,000 for Mr. Voboril, $6,710 for Mr. DeAngelo, $6,965 for Dr. Holmes and $7,250 for Mr. Mott; and a payout of $165,422 to Dr. Holmes made in fiscal 1999 in respect of stock appreciation rights granted in prior years.
(5) Mr. Hittman served as the President of Greatbatch-Hittman, Inc. until his retirement on December 31, 1999.
STOCK OPTION GRANTS
The following table sets forth the stock options we granted during the fiscal year ended December 31, 1999 to each of the named executive officers, including the potential realizable value over the 10 year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate of future stock price performance. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock.
48 OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------NUMBER OF PERCENTAGE OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED IN EXERCISE NAME OPTIONS GRANTED FISCAL 1999 PRICE ($/SHARE) ------Edward F. Voboril.... 3,167 1.3% $ 9.00
Edward F. Voboril.... 30,000 13.0 9.00
Edward F. Voboril.... 35,067 15.1 9.00
Larry T. DeAngelo.... 1,511 0.6 9.00
Larry T. DeAngelo.... 9,300 4.0 9.00
Curtis F. Holmes, Ph.D...... 1,759 0.7 9.00
Curtis F. Holmes, Ph.D...... 13,133 5.7 9.00
Richard W. Mott...... 1,626 0.7 9.00
Richard W. Mott...... 13,133 5.7 9.00
Fred Hittman...... 2,111 0.8 9.00
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------RATES OF STOCK PRICE APPRECIATION FOR OPTIONS TERM(1) ------NAME EXPIRATION DATE 5% 10% ------Edward F. Voboril.... September 23, 2009 $ 46,705 $ 75,618 Edward F. Voboril.... March 10, 2009 442,422 716,310 Edward F. Voboril.... December 31, 2009 517,147 837,577 Larry T. DeAngelo.... September 23, 2009 22,283 36,078 Larry T. DeAngelo.... December 31, 2009 137,337 222,056 Curtis F. Holmes, Ph.D...... September 23, 2009 25,940 41,999 Curtis F. Holmes, Ph.D...... December 31, 2009 193,677 313,576 Richard W. Mott...... September 23, 2009 23,979 38,824 Richard W. Mott...... December 31, 2009 193,677 313,576 Fred Hittman...... December 31, 2000 2,216 2,322
(1) Computed using the fair market value on the date of grant of $9.00, as determined by our Board of Directors.
FISCAL YEAR END OPTION VALUES
The table below provides information about the number and value of options held by the named executive officers at December 31, 1999. In the absence of a regular, active public market for our common stock, and based in part on consideration of comparable companies, the Compensation Committee estimated the fair value of the stock options granted in fiscal 1999 to have been $9.00 per share. The values of in- the-money options have been calculated on the basis of a $9.00 per share fair market value of our common stock as of that date, less the applicable exercise price.
YEAR END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE- OPTIONS AT MONEY OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 ------EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------Edward F. Voboril...... 51,053 202,414 $239,116 $689,684 Larry T. DeAngelo...... 21,158 67,386 107,392 309,408 Curtis F. Holmes, Ph.D...... 22,080 73,946 112,426 324,774 Richard W. Mott...... 23,133 76,013 112,426 324,774 Fred Hittman...... 2,111 ------
EMPLOYMENT AGREEMENT
On July 9, 1997, we entered into an employment agreement with Mr. Voboril, our President, Chief Executive Officer and Chairman. The agreement currently expires on June 30, 2001 and automatically extends for additional one year periods until we or Mr. Voboril gives notice to terminate not less than 12 months prior to the proposed termination date. We currently pay Mr. Voboril $320,000 per year and our Compensation Committee, along with our Board of Directors, has the right to increase Mr. Voboril's salary. Under the agreement, Mr. Voboril is entitled to a bonus equal to 75% of his
49 current base salary if our company achieves financial targets set by our Board of Directors and reflected in our annual budget.
If we terminate Mr. Voboril's employment without cause or if Mr. Voboril terminates his employment for good reason, we have agreed to pay to Mr. Voboril the greater of $285,000 or his current annual base salary and a bonus for the year of termination equal to a percentage of his base salary. If we terminate his employment without cause within six months before, or twelve months after, a change in control of our company, we will pay Mr. Voboril an amount equal to his current annual salary and a bonus equal to 75% of his current base salary. In addition, all performance stock options held by Mr. Voboril will automatically vest and he will have the right to exercise all unexercised options.
If we terminate Mr. Voboril's employment for cause or if Mr. Voboril terminates his employment without good reason, we will pay him his accrued base salary and other compensation that has accrued as of the termination date. However, we will not pay Mr. Voboril an annual bonus if we terminate his employment with cause, and any stock options granted to Mr. Voboril that have not vested will be forfeited and canceled. If we terminate Mr. Voboril for cause, we may, at our election, purchase all of his shares and vested stock options at the lesser of the shares' cost or fair market value.
So long as Mr. Voboril is not terminated without cause, he has agreed not to compete, directly or indirectly, against us during his employment and for two years after his employment ends. In addition, Mr. Voboril has agreed not to solicit any of our employees for two years after his employment ends.
We have not entered into employment agreements with our other named executive officers.
STOCK PLANS
We have two stock option plans that provide for the issuance of nonqualified and incentive stock options to our key employees and key employees of our subsidiaries. The terms of our 1997 stock option plan and 1998 stock option plan are substantially the same and both plans are administered by our Compensation Committee. Our 1997 stock option plan authorizes the issuance of options to acquire up to 800,000 shares of our common stock and our 1998 stock option plan authorizes the issuance of options to acquire up to 2,033,333 shares of our common stock. Options granted under our 1997 and 1998 stock option plans generally vest over a three to five year period and the vesting period can be accelerated depending upon the achievement by our company of performance standards, including earnings targets. Options expire 10 years from the date of the grant, except that incentive stock options granted to key employees expire five years from the date of grant. Options are granted with exercise prices equal to the fair market value of our common stock on the date of the grant. Options generally are non- transferable, other than by will or the laws of descent and distribution and are exercisable only by the grantee while the grantee is alive. Both of our stock option plans contain a change in control provision. If a change in control of our company occurs, at the discretion of our Compensation Committee, each option granted under our stock option plans may be terminated. If this occurs, we are to pay each optionholder an amount equal to the difference between the fair market value of each share and the exercise price per share. This amount would be payable upon the closing of a transaction that results in a change in control.
As of May 1, 2000, 967,028 shares of our common stock were issuable upon exercise of outstanding stock options, subject in some cases to vesting conditions, and 1,818,592 options were available for future grants under our 1997 and 1998 stock option plans. The weighted average remaining contractual life of granted options is seven years. The average weighted exercise price per share of the options outstanding as of May 1, 2000 was $5.34.
50 INCENTIVE COMPENSATION PLANS
We sponsor various incentive compensation programs, which provide for the payment of cash to key employees based upon achievement of specific earnings goals before incentive compensation expense. The scheduled aggregate payment amounts relating to our deferred compensation plans as of March 31, 2000 were as follows:
(IN THOUSANDS) ------2000...... $ 680 2001...... 660 2002...... 14 ------1,354 Less current maturities of deferred compensation (included in accrued liabilities)...... (680) ------Long-term portion of deferred compensation...... $ 674 ======
EMPLOYEE STOCK OWNERSHIP PLAN
We sponsor an employee stock ownership plan, or ESOP, and related trust as a long-term benefit for substantially all of our employees. There are two components to contributions under the ESOP. The first component is a defined contribution pension plan whose annual contribution equals 5% of each employee's compensation. Contributions to the ESOP are in the form of our common stock. The second component is a discretionary profit sharing contribution determined by the Board of Directors. This profit sharing contribution is also contributed to the ESOP in the form of shares of our common stock. The ESOP is subject to contribution limitations and vesting requirements.
51 RELATED PARTY TRANSACTIONS
We describe below some of the transactions we have entered into with parties that are related to our company. We believe that each of the transactions described below was on terms no less favorable to us than we could have obtained from unrelated parties.
LEVERAGED BUYOUT
In July 1997, DLJ Merchant Banking and members of our management acquired our predecessor company, Wilson Greatbatch Ltd., in a leveraged buyout transaction. As a result of the leveraged buyout and transactions entered into in connection with it:
- DLJ Merchant Banking acquired 86.4% of our common stock;
- Greatbatch family members, who were the former controlling shareholders of our predecessor company, acquired 9.2% of our common stock;
- members of our management acquired 2.2% of our common stock; and
- holders of our 13% senior subordinated notes not affiliated with DLJ Merchant Banking acquired the remaining 2.2% of our common stock.
SALES OF COMMON STOCK TO MANAGEMENT
In July 1997, in connection with the leveraged buyout, we sold 13,910,606 shares of our common stock to DLJ Merchant Banking for an aggregate purchase price of $41,731,818. At that time, we also issued the following number of shares of common stock for the following purchase price to some of our executive officers:
NUMBER OF SHARES PURCHASE PRICE ------Edward F. Voboril...... 95,000 $285,000 Tim H. Belstadt...... 37,000 111,000 Larry T. DeAngelo...... 42,667 128,000 Curtis F. Holmes, Ph.D...... 44,667 134,000 Arthur J. Lalonde...... 30,000 90,000 Richard W. Mott...... 44,667 134,000 Susan M. Bratton...... 23,667 71,000
In November 1997, we sold 561,332 shares of our common stock, for an aggregate purchase price of $1,684,000, to some of our executive officers and issued loans to them in the amount of their respective purchase price, as further described below.
In August 1998, we sold 4,748,973 shares of our common stock to DLJ Merchant Banking for an aggregate purchase price of $14,246,919. At that time we also sold the following number of shares of common stock for the following purchase price to some of our executive officers:
NUMBER OF SHARES PURCHASE PRICE ------Edward F. Voboril...... 101,370 $304,110 Tim H. Belstadt...... 33,333 99,999 Larry T. DeAngelo...... 45,527 136,381 Curtis F. Holmes, Ph.D...... 47,662 142,986 Arthur J. Lalonde...... 33,831 101,493 Richard W. Mott...... 10,000 30,000 Susan M. Bratton...... 26,667 80,001
In September 1999, we sold 83,333 shares of our common stock for an aggregate purchase price of $750,000 to Fred Hittman, who at that time was serving as President of Greatbatch-Hittman, Inc.
52 DIRECTOR AND OFFICER LOANS
On November 1, 1997, we issued loans to a number of our executive officers and key employees in connection with their purchases of shares of our common stock. Each loan bears interest at an annual rate of 6.42%, is secured by a pledge of the shares purchased with the proceeds of the loan and matures on November 1, 2007. The following table sets forth, with respect to our current and former executive officers and directors, the purchase price for the common stock, which is equal to the amount of indebtedness owed to us by each individual as of May 1, 2000 and the largest aggregate amount of indebtedness outstanding during the year ended December 31, 1999, and the number of shares of our common stock purchased and pledged by each individual to secure that indebtedness:
INDEBTEDNESS SHARES PURCHASED ------Edward F. Voboril...... $ 570,000 190,000 Larry T. DeAngelo...... 256,000 85,333 Curtis F. Holmes, Ph.D...... 268,000 89,333 Arthur J. Lalonde...... 180,000 60,000 Richard W. Mott...... 268,000 89,333 Susan M. Bratton...... 142,000 47,333 ------Total...... $1,684,000 561,332 ======
The borrowers will have the option to repay their respective loans by tendering to us, at the time of the offering, a number of their shares of our common stock equal to their indebtedness, based on a price per share equal to the initial public offering price per share.
SECURITIES PURCHASE AGREEMENT
In July 1997, we and WGL Acquisition Corp., a company formed by DLJ Merchant Banking to acquire all of the shares of our predecessor, which later merged into our predecessor, entered into a securities purchase agreement with DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C. and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life Insurance Company. In accordance with the agreement, we issued and sold 1,062,771 shares which at the time of issuance represented approximately 7% of our common stock. At the same time as the share issuance, WGL Acquisition Corp. issued 13% senior subordinated notes in the aggregate principal amount of $25.0 million, which have since become obligations of our company. Our senior subordinated notes mature on July 1, 2007. Affiliates of DLJ Merchant Banking originally purchased $22.5 million of the principal amount of the notes. In October 1997, an affiliate of DLJ Merchant Banking transferred $5.0 million of the principal amount of the notes to an affiliate of Merrill Lynch, Pierce Fenner & Smith Incorporated.
REGISTRATION AND ANTI-DILUTION AGREEMENT
We entered into a registration and anti-dilution agreement with DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C. and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life Insurance Company in July 1997. The agreement provides for adjustments to the numbers of shares held by the purchasers to prevent dilution from issuance of shares for less than fair market price. If we propose to register any of our common stock under the Securities Act, either for our own account or for the account of other securityholders, the purchasing parties are entitled to include their shares in the registration. In addition, parties holding more than 25% of the securities entitled to registration may require us to prepare and file a registration statement under the Securities Act at any time after this offering. We are not obligated to effect more than two of these demand registrations. The managing underwriter of the offering has the right to limit the number of shares in any
53 registration relating to the agreement if the underwriter believes that the success of the offering would be materially and adversely affected because of its size or kind. If more than half of the securities entitled to registration are excluded by the managing underwriter, the holders of the registration rights are to be given an additional demand registration.
NOTE REGISTRATION RIGHTS AGREEMENT
We entered into a registration and anti-dilution agreement with DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C. and Donaldson, Lufkin & Jenrette Securities Corporation, all of which are entities affiliated with DLJ Merchant Banking, and The Northwestern Mutual Life Insurance Company in July 1997. The agreement provides that the parties will receive sufficient shares to prevent dilution in certain instances, if we issue shares for less than the current market price, and grants the parties certain registration rights with respect to the 13% senior subordinated notes. We intend to use the net proceeds of this offering to repay all of the 13% senior subordinated notes.
AMENDED AND RESTATED CREDIT AGREEMENT
We entered into a credit agreement with a syndicate of financial institutions led by DLJ Capital Funding, Inc. on July 10, 1997. DLJ Capital Funding, Inc. is an affiliate of DLJ Merchant Banking. The parties to the credit agreement amended and restated it on August 7, 1998. On November 15, 1999, the parties to the credit agreement entered into a waiver and amendment which, among other things, waived compliance with financial covenants contained in the credit agreement. On February 10, 2000, the parties to the credit agreement again amended provisions of the credit agreement governing the applicable interest margins and financial covenants. The credit agreement includes the following commitments:
- a Term A loan commitment, under which:
- there is a maximum principal amount of $50.0 million;
- loan amounts bear interest, at our option, at prime plus 2.25% or LIBOR plus 3.50%;
- we had $45.0 million outstanding as of May 1, 2000; and
- loans mature on September 30, 2004.
- a Term B loan commitment, under which:
- there is a maximum principal amount of $60.0 million;
- loan amounts bear interest, at our option, at prime plus 2.50% or LIBOR plus 3.75%;
- we had $59.1 million outstanding as of May 1, 2000; and
- loans mature on September 30, 2006.
- a revolving line of credit commitment, under which:
- there is a maximum principal amount of $13.0 million, which may increase to $20.0 million after December 31, 2000, in each case if we meet our financial targets, including the debt to EBITDA ratio set forth in the credit agreement;
- we had $1.8 million outstanding and $11.2 million available, subject to customary borrowing conditions, as of May 1, 2000;
- loan amounts bear interest at prime plus 2.25% or LIBOR plus 3.50%;
- we pay a commitment fee equal to 0.50% per year, calculated on the unused portion on the revolving loan commitment; and
- loans mature on September 30, 2004.
54 The credit agreement also includes a letter of credit commitment in the maximum aggregate stated amount of $10.0 million and a swing line loan commitment in a maximum aggregate outstanding principal amount of $2.0 million. Our swing line loan facility is a subfacility of the revolving line of credit in which the agent advances funds on the same day, following timely notice by telephone, on behalf of the revolving credit lenders as a convenience for us and as an administrative convenience for the revolving credit lenders. The revolving credit lenders are required to fund their pro rata share of any swing line loan at the request of the agent if we do not repay the swing line loan.
The credit agreement is subject to conditions precedent, financial covenants, representations and warranties, as well as affirmative and negative covenants. Borrowings under the credit agreement are secured by our shares and shares of one of our affiliates, balances, credits and deposits and monies held by the lenders and substantially all of our assets. In connection with the credit agreement, we pledged all of the issued and outstanding shares of common stock of our subsidiary, WGL Intermediate Holdings, Inc., and that company pledged all of the issued and outstanding common shares of its subsidiary, Wilson Greatbatch Ltd., to Fleet National Bank, as administrative agent under the credit agreement.
The credit agreement provides that a change in control of our company constitutes an event of default. The failure of DLJ Merchant Banking to own in excess of 50% of the capital stock of our company and the failure of DLJ Merchant Banking to have the right to elect a majority of our Board of Directors constitute change in control events.
The credit agreement, in connection with the pledge agreements we entered into, entitles the holders of shares pledged under those agreements to require us to register the shares under the Securities Act if the administrative agent determines to exercise his right to sell the pledged shares upon the occurrence of an event of default under the credit agreement. In the event that we fail to register the pledged shares pursuant to the credit agreement, we will pay, as liquidated damages, an amount equal to the pledged shares' value as of the date that the administrative agent demanded registration.
In connection with the credit agreement, we have paid the following amounts to affiliates of DLJ Merchant Banking in the periods indicated for interest and various fees, including commitment, waiver and amendment and debt financing fees:
YEAR INTEREST PAID FEES PAID ------1997...... $423,886 $1,102,500 1998...... 52,246 1,709,189 1999...... -- -- 2000...... -- --
STOCKHOLDERS AGREEMENTS
In July 1997, we entered into three separate stockholders agreements with DLJ Merchant Banking and other parties, including members of our management who participated in the leveraged buyout and are stockholders of our company. The terms of the three stockholders agreements are substantially the same. In the agreements, we agreed to matters in connection with our management and operations and the sale, transfer and other disposition of our stock by the parties. The stockholders agreements will survive the closing of this offering. The agreements provide that the parties to the agreements and our company will take all action required to cause our Board of Directors to consist of eight directors, one of whom shall be our Chief Executive Officer. So long as they collectively beneficially own at least 3% of the fully-diluted shares of our common stock, members of the Greatbatch family, who are the former controlling stockholders of our company, have the right to nominate one director to our Board of Directors. DLJ Merchant Banking has the right to nominate all other members of our Board of
55 Directors. The parties to the stockholders agreements have agreed to vote in favor of nominees selected by DLJ Merchant Banking and, if applicable, the Greatbatch family nominee.
Subject to pro rata and underwriter exceptions, if we propose to file a registration statement relating to an offering of any of our equity securities, the parties to the agreements have the right to have their shares of our common stock registered and sold as part of the offering.
DLJ FINANCIAL ADVISORY AGREEMENT
On July 10, 1997, we appointed Donaldson, Lufkin & Jenrette Securities Corporation, or DLJ, to act as our exclusive financial advisor with respect to reviewing and analyzing financial alternatives for our company. Under the agreement, DLJ assists us from time to time in analyzing our operations and historical performance as well as our future prospects, with a view to meeting our long term strategic objectives. The agreement expires on July 10, 2002. In accordance with this agreement, we pay DLJ $100,000 annually and as further compensation, DLJ has the right to act as our exclusive financial advisor and sole managing underwriter for any underwritten public offering of our stock and other financial transactions consummated by our company during the engagement period. DLJ is an affiliate of DLJ Merchant Banking and is one of the joint book-running managers for this offering.
HITTMAN AGREEMENTS
In August 1998, we purchased all of the outstanding capital stock of Hittman from Fred Hittman, the sole shareholder, for $71.8 million. Fred Hittman subsequently served as the President of our subsidiary Greatbatch-Hittman, Inc. until his retirement on December 31, 1999. We paid $69.0 million of the purchase price at the time of the acquisition and an additional $2.8 million after Hittman achieved financial targets in 1998.
We lease our Columbia, Maryland facility from Mr. Hittman under an agreement that expires in 2006. In accordance with the agreement, we made payments to Mr. Hittman of $83,655 for the period from August 8, 1998 to the end of fiscal 1998 and $210,600 in 1999. The annual rental payment under the lease is $210,600 until 2003, at which time it increases annually until the termination of the lease. The average annual rental payment throughout the term of the lease is $219,600. In addition, we have an option to purchase the leased property for the agreed fair market value at the time when the lease expires.
In August 1999, we entered into a stockholders agreement with Fred Hittman, then President of Greatbatch-Hittman, Inc., and DLJ Merchant Banking. In the agreement, we and Fred Hittman agreed to matters in connection with the sale, transfer or other disposition of the common stock by Fred Hittman. The stockholders agreement will survive the closing of this offering. The stockholders agreement provides that Fred Hittman will take all action required to cause our Board of Directors to include all of the directors designated by DLJ Partners II or its successor in interest.
GREATBATCH LEASE AGREEMENT
We lease approximately 18,550 square feet at one of our Clarence, New York facilities from Warren Greatbatch, as trustee under an irrevocable trust agreement for the benefit of Ericka Dee Greatbatch, who is the niece of Lawrence A. Maciariello, a former director. Warren Greatbatch is the brother-in-law of Mr. Maciariello. In accordance with the lease agreement, which will expire on March 31, 2018, we made payments to the trust of $86,400 per year in each of fiscal 1997, 1998 and 1999. This lease provides that the rental rate is to be adjusted in 2003, 2008 and 2013 to reflect the fair market rental value at that time.
56 PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our common stock as of May 1, 2000, and as adjusted to reflect the sale of shares of our common stock in this offering, by:
- each person who owns more than 5% of our outstanding shares of common stock;
- each of our named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
PERCENTAGE OF COMMON STOCK OUTSTANDING NUMBER OF SHARES ------BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------Entities affiliated with DLJ Merchant Banking Partners II, L.P. (1)(2)...... 17,047,025 81.1% % 277 Park Avenue New York, New York 10172 Edward F. Voboril (3)(4)...... 437,422 2.1% % Larry T. DeAngelo (3)(5)...... 194,685 * * Curtis F. Holmes, Ph.D. (3)(6)...... 203,741 * * Richard W. Mott (3)(7)...... 161,441 * * Fred Hittman(8)...... 83,333 * * David L. Jaffe (2)(9)...... 17,047,025 81.1% % Robert E. Rich, Jr.(3)(10)...... 33,333 * * Douglas E. Rogers (2)(9)...... 17,047,025 81.1% % Henry Wendt (2)(9)...... 17,047,025 81.1% % David M. Wittels (2)(9)...... 17,047,025 81.1% % All directors and executive officers as a group (10 persons) (2)(3)(4)(5)(6)(7)(9)(10)(11)...... 18,216,338 86.7% %
* Less than 1%.
(1) Consists of shares held directly by DLJ Merchant Banking Partners II, L.P. and the following related investors: DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJMB Funding II, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., UK Investment Plan 1997 Partners, DLJ EAB Partners, L.P., DLJ First ESC, L.P. and DLJ ESC II, L.P.
(2) Voting power with respect to the shares reported is shared, pursuant to the stockholders agreements entered into in July 1997 and August 1999, with the other parties to the stockholders agreements. Therefore, the various entities affiliated with DLJ Merchant Banking and Messrs. Jaffe, Rogers, Wendt and Wittels each may be deemed to beneficially own all of the 21,021,597 shares of common stock with respect to which voting power is shared pursuant to the stockholders agreements, which is equivalent to 100.0% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
(3) Voting power with respect to the shares reported is shared, pursuant to stockholders agreements entered into in July 1997, with the other parties to the stockholders agreements. Therefore, Messrs. Voboril, DeAngelo, Holmes, Mott and Rich each may be deemed to beneficially own all of the shares of common stock with respect to which voting power is shared pursuant to the stockholders agreements.
(4) Includes 51,053 shares Mr. Voboril has the right to acquire pursuant to options exercisable within 60 days after May 1, 2000. Mr. Voboril shares voting power with respect to 19,967,340 shares of common stock, which is equivalent to 94.8% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
57 (5) Includes 21,158 shares Mr. DeAngelo has the right to acquire pursuant to options exercisable within 60 days after May 1, 2000. Mr. DeAngelo shares voting power with respect to 19,937,445 shares of common stock, which is equivalent to 94.7% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
(6) Includes 22,080 shares Mr. Holmes has the right to acquire pursuant to options exercisable within 60 days after May 1, 2000. Mr. Holmes shares voting power with respect to 19,938,367 shares of common stock, which is equivalent to 94.7% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
(7) Includes 1,443 shares held by Mr. Mott as trustee of the Sarah E. Mott Trust, 1,443 shares held by Mr. Mott as trustee of the Lindsay Mott Trust, 1,443 shares held by Mr. Mott as trustee of the Rachel Mott Trust and 23,113 shares Mr. Mott has the right to acquire pursuant to options exercisable within 60 days after May 1, 2000. Mr. Mott shares voting power with respect to 19,939,400 shares of common stock, which is equivalent to 94.7% of the common stock outstanding before this offering and % of this common stock outstanding after this offering.
(8) Voting power with respect to the shares reported is shared, pursuant to a stockholders agreement entered into in August 1999, with the other parties to the stockholders agreement. Therefore, Mr. Hittman may be deemed to beneficially own all of the shares of common stock with respect to which voting power is shared pursuant to the stockholders agreement. Mr. Hittman shares voting power with respect to 17,130,358 shares of common stock, which is equivalent to 81.5% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
(9) Consists of shares held by entities affiliated with DLJ Merchant Banking Partners II, L.P., all of which are funds managed by DLJ Merchant Banking. Messrs. Jaffe, Rogers, Wendt and Wittels disclaim beneficial ownership of such shares.
(10) Mr. Rich shares voting power with respect to 19,916,287 shares of common stock, which is equivalent to 94.7% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
(11) All directors and executive officers as a group share voting power with respect to, and therefore may be deemed to beneficially own, 21,139,001 shares of common stock, which is equivalent to 100.0% of the common stock outstanding before this offering and % of the common stock outstanding after this offering.
58 DESCRIPTION OF CAPITAL STOCK
Immediately following the consummation of this offering, the authorized capital stock of our company will consist of 100,000,000 shares of common stock, par value $.001 per share, and 100,000,000 shares of preferred stock, par value $.001 per share, the rights and preferences of which may be established from time to time by our Board of Directors. As of May 1, 2000, there were 21,021,597 shares of common stock outstanding that were held of record by more than 100 stockholders. Upon completion of this offering, there will be outstanding shares of common stock, no outstanding shares of preferred stock and options to purchase shares of common stock.
The following discussion summarizes the material provisions of our capital stock and the anti-takeover provisions that will be contained in our certificate of incorporation and bylaws upon consummation of this offering. This summary is qualified by our restated certificate of incorporation and bylaws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part.
Our restated certificate of incorporation and bylaws contain provisions, such as the authorization of "blank check" preferred stock, limiting who may call special meetings of our stockholders and advance notice procedures that are required for stockholders to nominate candidates for election to our Board of Directors or propose matters to be acted upon at stockholder meetings, which are intended to enhance the likelihood of continuity and stability in the composition of our Board of Directors. These provisions may have the effect of delaying, deferring or preventing a future takeover or change in control of our company, unless such takeover or change in control is approved by our Board of Directors.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Because holders of common stock do not have cumulative voting rights, the holders of a majority of the shares of common stock can elect all of the members of our Board of Directors. Subject to preferences of any preferred stock that may be issued in the future, the holders of common stock are entitled to receive dividends as may be declared by our Board of Directors. The common stock is entitled to receive pro rata all of the assets of our company available for distribution to our stockholders. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors will be authorized, without further action by our stockholders, to issue shares of preferred stock in one or more series. The Board will have discretion to determine the rights, preferences, privileges and limitations of each series, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences. Satisfaction of any dividend preference of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of common stock. In some circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. We have no current intention to issue any shares of preferred stock.
OPTIONS
As of May 1, 2000, options to purchase a total of 967,028 shares of our common stock were outstanding, and options to acquire up to 1,818,592 shares of common stock may be available for future issuance under our existing stock option plans. The average weighted exercise price per share of the options outstanding as of May 1, 2000 was $5.34.
59 REGISTRATION RIGHTS
After this offering, the holders of 21,021,597 shares of our common stock will be entitled to registration rights. If we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of registration and are entitled to include shares of common stock, subject to pro rata and underwriting exceptions. Additionally, some of our stockholders have demand registration rights pursuant to which they may require us on up to two occasions, to file a registration statement under the Securities Act at our expense. The registration rights are subject to the right of the underwriters of an offering to limit the number of shares included in the registration and our right not to effect a required registration within 180 days following an offering of our securities pursuant to a registration statement in connection with an underwritten public offering, including this offering. If more than half of the securities entitled to demand registration are excluded by the underwriters, the holders of demand registration rights are to be given an additional demand registration right. These registration rights are also subject to our right not to effect a requested registration, for no more than one 120 day period during any calendar year, if our Board of Directors determines in good faith to delay the filing to allow our company to include financial statements in the registration statement or if our Board of Directors reasonably determines that effectiveness of the registration statement or an offering would materially adversely affect a pending or proposed acquisition, merger or other significant corporate transaction.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS
Our restated certificate of incorporation limits the liability of directors to the fullest extent permitted by Delaware law. The effect of these provisions is to eliminate the rights of our company and our stockholders, through stockholders' derivative suits on behalf of our company, to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior. However, our directors will be personally liable to us and our stockholders for monetary damages if they acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from their actions as directors. In addition, our restated certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We expect to enter into indemnification agreements with our current directors and executive officers prior to the completion of this offering. We also maintain directors and officers insurance.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation law which regulates corporate acquisitions. This law provides that specified persons who, together with affiliates and associates, own, or within three years did own, 15% or more of the outstanding voting stock of a corporation may not engage in business combinations with the corporation for a period of three years after the date on which the person became an interested stockholder. The law does not include interested stockholders prior to the time our common stock is listed on The New York Stock Exchange. The law defines the term "business combination" to include mergers, asset sales and other transactions in which the interested stockholder receives or could receive a financial benefit on other than a pro rata basis with other stockholders. This provision has an anti-takeover effect with respect to transactions not approved in advance by our Board of Directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock. With approval of our stockholders, we could amend our certificate of incorporation in the future to avoid the restrictions imposed by this anti-takeover law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C.
60 SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding shares of common stock and outstanding options to purchase shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no additional option grants or exercises after , 2000. Of the shares to be sold in this offering, shares will be subject to the lock-up agreements described below, assuming that we sell all shares reserved under our directed share program to the entities or persons for whom these shares have been reserved. We expect that the remaining shares, plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining shares outstanding and shares subject to outstanding options are "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if the sale is registered or if it qualifies for an exemption from registration, such as under Rule 144, Rule 144(k) or Rule 701 promulgated under the Securities Act, which are summarized below.
LOCK-UP AGREEMENTS
We, our executive officers and directors and substantially all of our stockholders, including DLJ Merchant Banking, have agreed, for a period of 180 days after the date of this prospectus, not to, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of the transactions described in these clauses are to be settled by the delivery of common stock, or such other securities, in cash or otherwise.
RULE 144
In general, under Rule 144 as currently in effect, beginning 180 days after the date of this prospectus, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; and
- the average weekly trading volume of our common stock on The New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice requirements of Rule 144.
61 RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144, but without compliance with holding period and in some cases volume limitation and other restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144, 90 days after the effective date of this offering without complying with the holding period requirement contained in Rule 144 and that non-affiliates may sell such shares in reliance on Rule 144 90 days after the effective date of this offering without complying with the holding period, public information, volume limitation or notice requirements of Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of approximately 21,021,597 shares of common stock will be entitled to rights with respect to registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares, except for shares purchased by affiliates of our company, becoming freely tradable without restriction under the Securities Act immediately on the effective date of this offering.
STOCK OPTIONS
Following expiration of the 180 day lock-up period described above, we intend to file a registration statement on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and common stock issued or issuable under our stock option plans. Shares of common stock registered under any registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market.
62 UNDERWRITING
Subject to the terms and conditions of an underwriting agreement dated , 2000, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc., have severally agreed to purchase from us the number of shares of common stock set forth opposite their names below.
NUMBER UNDERWRITERS OF SHARES ------Donaldson, Lufkin & Jenrette Securities Corporation...... Merrill Lynch, Pierce, Fenner & Smith Incorporated...... Banc of America Securities LLC...... U.S. Bancorp Piper Jaffray Inc...... DLJDIRECT Inc...... --- Total...... ===
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of our common stock offered by this prospectus are subject to the approval by their counsel of legal matters and other conditions. The underwriters must purchase and accept delivery of all the shares of our common stock offered by this prospectus, other than those shares covered by the over-allotment option described below, if any are purchased.
The underwriters propose initially to offer some of the shares of our common stock directly to the public at the public offering price on the cover page of this prospectus and some of the shares of our common stock to dealers, including the underwriters, at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may re-allow, a concession not in excess of $ per share on sales to other dealers. After the initial offering of our shares to the public, the representatives of the underwriters may change the public offering price and other selling terms.
We have granted to the underwriters an option, exercisable within 30 days after the date of the underwriting agreement, to purchase up to additional shares of our common stock at the initial public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to their initial purchase commitment.
The following table shows the underwriting fees to be paid by us in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock.
NO EXERCISE FULL EXERCISE ------Per share...... $ $ Total...... $ $
We will pay the offering expenses, estimated to be $ .
We have agreed to indemnify the underwriters against specified civil liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make because of those liabilities.
63 We, our executive officers and directors and substantially all of our stockholders have agreed, for a period of 180 days after the date of this prospectus, not to, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation:
- offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock; or
- enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of the transactions described in these clauses are to be settled by the delivery of common stock, or such other securities, in cash or otherwise.
The underwriting agreement contains limited exceptions to these lock-up agreements.
In addition, during this 180 day period, we have agreed not to file any registration statement with respect to, and each of our executive officers and directors and a substantially all of our stockholders have agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to this offering, there was no established trading market for our common stock. The initial public offering price for our common stock will be determined by negotiation among us and the representatives of the underwriters. The factors to be considered in determining the initial public offering price include:
- the history of and the prospects for the industry in which we compete;
- the ability of our management;
- our past and present operations;
- our prospects for future earnings;
- the general condition of the securities markets at the time of this offering; and
- the recent market prices of securities of generally comparable companies.
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares of our common stock offered in this prospectus in any jurisdiction where action for that purpose is required. The shares of our common stock offered in this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any shares of our common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of the jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering of our common stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of our common stock included in this offering in any jurisdiction where that would not be permitted or legal.
In connection with this offering, some underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may create a syndicate short position by making short sales of our common stock and may purchase our common stock on the open market to cover syndicate short positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in the offering. Short sales can be either "covered" or "naked." "Covered" short sales are
64 sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares in the offering. "Naked" short sales are sales in excess of the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. The underwriters may close out any covered short positions by either exercising their over-allotment option or purchasing shares in the open market. The underwriters must close out any naked short position by purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. The underwriting syndicate may reclaim selling concessions if the syndicate repurchases previously distributed shares of our common stock in syndicate covering transactions, in stabilizing transactions or in some other way if Donaldson, Lufkin & Jenrette Securities Corporation receives a report that indicates clients of such syndicate members have "flipped" the common stock. These activities may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time.
At our request, certain of the underwriters have reserved up to 5% of the shares offered by this prospectus for sale at the initial public offering price to our employees, officers, directors and other individuals associated with us and members of their families. The number of shares of common stock available for sale to the general public will be reduced to the extent any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares of our common stock. Reserved shares will not be subject to lock-up agreements.
We have applied to have our common stock listed on The New York Stock Exchange under the symbol "GB."
An electronic prospectus is available on the web sites maintained by Merrill Lynch and DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, respectively. Other than the prospectus in electronic format, the information on the Merrill Lynch and DLJDIRECT Inc. web sites relating to this offering is not a part of this prospectus.
DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A, L.P., DLJMB Funding II, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., UK Investment Plan 1997 Partners, DLJ EAB Partners, L.P., DLJ First ESC, L.P. and DLJ ESC II, L.P., each of which is an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, are stockholders of our company. In addition, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated owns 637,662 shares of our common stock.
In addition, DLJ Merchant Banking Partners II, L.P and its affiliates have the right to appoint a majority of the members of our Board of Directors. DLJ Capital Funding, Inc. acted as syndication agent and is a lender under our bank credit facility. In addition, affiliates of some of the underwriters are lenders under our bank credit facility and will receive proceeds from this offering upon repayment of this indebtedness. Prior to this offering, Donaldson, Lufkin & Jenrette Securities Corporation and its affiliates and employees owned an aggregate of approximately 81% of the issued and outstanding shares of our common stock.
The offering is being conducted in accordance with Rule 2720 of the Conduct Rules of the NASD, which provides that, among other things, when an NASD member distributes securities of a company in which it owns 10% or more of the company's outstanding voting securities, the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" meeting
65 specified standards. In accordance with this requirement, Merrill Lynch, Pierce, Fenner & Smith Incorporated will serve in this role and will recommend a price in compliance with the requirements of Rule 2720. In connection with this offering, Merrill Lynch, Pierce, Fenner & Smith Incorporated, in its role as qualified independent underwriter, has exercised its usual standards of "due diligence" and has reviewed and participated in the preparation of this prospectus and the registration statement of which this prospectus forms a part and will recommend the maximum price at which our common stock may be offered hereby. As compensation for serving as the qualified independent underwriter, we have agreed to pay Merrill Lynch, Pierce, Fenner & Smith Incorporated $5,000.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered by this prospectus will be passed on for us by Weil, Gotshal & Manges LLP, Houston, Texas. Certain legal matters relating to the common stock offered by this prospectus will be passed on for the underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P., New York, New York.
EXPERTS
The consolidated balance sheets of Wilson Greatbatch Technologies, Inc. and subsidiary as of January 1, 1999 and December 31, 1999 and the consolidated statements of operations, stockholders' equity and cash flows for the period from July 11, 1997 to January 2, 1998 and for each of the two years in the period ended December 31, 1999 and the statements of operations, stockholders' equity and cash flows of Wilson Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997 included in this prospectus and the related financial statement schedule included elsewhere in the registration statement of which this prospectus is a part have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Hittman Materials and Medical Components, Inc. at August 7, 1998 and December 31, 1997 and for the period from January 1, 1998 through August 7, 1998 and for the year ended December 31, 1997 have been included herein in reliance upon the report of Grant Thornton LLP, independent public accountants, appearing elsewhere herein and given on the authority of said firm as experts in auditing and accounting in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act relating to the common stock being sold in this offering. This prospectus constitutes a part of that registration statement. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement because some parts have been omitted in accordance with the rules and regulations of the Commission. For further information about us and the common stock being sold in this offering, you should refer to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus regarding the contents of any agreement, contract or other document referred to are not necessarily complete. Reference is made in each instance to the copy of the contract or document filed as an exhibit to the registration statement. Each statement is qualified by reference to the exhibit. The registration statement, including related exhibits and schedules, may be inspected without charge at the Commission's principal office in Washington, D.C. Copies of all or any part of the registration statement may be obtained after payment of fees prescribed by the Commission from:
- the Commission's Public Reference Room at the Commission's principal office, 450 Fifth Street, N.W., Washington, D.C. 20549; or
66 - the Commission's regional offices in:
- New York, located at 7 World Trade Center, Suite 1300, New York, New York 10048; or
- Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may obtain information regarding the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the Commission. The address of the web site is WWW.SEC.GOV.
We intend to furnish holders of our common stock with annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited condensed financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law.
67 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY AND WILSON GREATBATCH LTD.:
Independent Auditors' Report...... F-2
Consolidated Balance Sheets as of January 1, 1999 and December 31, 1999...... F-3
Statement of Operations for the period from January 1, 1997 to July 10, 1997 and Consolidated Statements of Operations for the period from July 11, 1997 to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999...... F-4
Statement of Stockholders' Equity for the period from January 1, 1997 to July 10, 1997 and Consolidated Statements of Stockholders' Equity for the period from July 11, 1997 to January 2, 1998 and for the years ended January 1, 1999 and December 31, 1999...... F-5
Statement of Cash Flows for the period from January 1, 1997 to July 10, 1997 and Consolidated Statements of Cash Flows for the period from July 11, 1997 to January 2, 1998 and for the years ended January 1, 1999 and December 31, 1999...... F-6
Notes to Financial Statements for the period from January 1, 1997 to July 10, 1997 and Consolidated Financial Statements for the period from July 11, 1997 to January 2, 1998 and for the years ended January 1, 1999 and December 31, 1999...... F-7
HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.:
Report of Independent Certified Public Accountants...... F-28
Balance Sheets as of August 7, 1998 and December 31, 1997...... F-29
Statements of Operations for the period from January 1, 1998 through August 7, 1998 and for the year ended December 31, 1997...... F-30
Statements of Stockholder's Equity for the period from January 1, 1998 through August 7, 1998 and for the year ended December 31, 1997...... F-31
Statements of Cash Flows for the period from January 1, 1998 through August 7, 1998 and for the year ended December 31, 1997...... F-32
Notes to Financial Statements for the period from January 1, 1998 through August 7, 1998 and for the year ended December 31, 1997...... F-33
F-1 INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Wilson Greatbatch Technologies, Inc. Clarence, New York
We have audited the accompanying consolidated balance sheets of Wilson Greatbatch Technologies, Inc. and subsidiary (the "Company") as of December 31, 1999 and January 1, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from July 11, 1997 (date of organization) to January 2, 1998 and for each of the two years in the period ended December 31, 1999. We have also audited the statements of operations, stockholders' equity and cash flows of Wilson Greatbatch Ltd. (the "Predecessor") for the period from January 1, 1997 to July 10, 1997. Our audits also included the financial statement schedule listed in the Index at Item 16(B) of the registration statement. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Wilson Greatbatch Technologies, Inc. and subsidiary as of December 31, 1999 and January 1, 1999, and the results of their operations and their cash flows for the period from July 11, 1997 to January 2, 1998 and for each of the two years in the period ended December 31, 1999 and the results of operations and cash flows of Wilson Greatbatch Ltd. for the period from January 1, 1997 to July 10, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1999, the Company changed its method of accounting for the costs of start- up activities.
DELOITTE & TOUCHE LLP
Buffalo, New York January 21, 2000 (March 14, 2000 as to Note 18 and May 18, 2000 as to the effects of the reverse stock split described in Note 1)
F-2 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JANUARY 1, DECEMBER 31, MARCH 31, 1999 1999 2000 ------(UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents...... $ 4,140 $ 3,863 $ 2,474 Accounts receivable, net of allowance for doubtful accounts of $197 and $219 as of January 1, 1999 and December 31, 1999, respectively...... 11,963 11,016 10,460 Inventories...... 13,291 13,583 14,717 Prepaid expenses and other assets...... 227 868 1,322 Refundable income taxes...... 698 2,520 2,210 Deferred tax asset...... 1,669 1,520 1,520 ------Total current assets...... 31,988 33,370 32,703
PROPERTY, PLANT AND EQUIPMENT, NET...... 29,495 33,557 34,199 INTANGIBLE ASSETS, NET...... 120,900 112,902 111,194 DEFERRED TAX ASSET...... 8,988 7,828 7,828 OTHER ASSETS...... 3,019 2,122 1,858 ------TOTAL ASSETS...... $194,390 $189,779 $187,782 ======
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable...... $ 2,134 $ 2,385 $ 2,638 Accrued liabilities...... 14,148 7,139 9,247 Current maturities of long-term obligations...... 2,950 6,225 6,850 ------Total current liabilities...... 19,232 15,749 18,735
LONG-TERM OBLIGATIONS...... 128,336 126,988 122,393 DEFERRED COMPENSATION...... 1,227 635 674 ------Total liabilities...... 148,795 143,372 141,802 ------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
STOCKHOLDERS' EQUITY: Common stock...... 20 20 20 Subscribed common stock...... 1,684 1,684 1,684 Capital in excess of par value...... 60,287 63,480 63,480 Retained deficit...... (14,712) (16,984) (17,376) ------Subtotal...... 47,279 48,200 47,808 Less treasury stock, at cost...... -- (109) (144) Less subscribed common stock receivable...... (1,684) (1,684) (1,684) ------Total stockholders' equity...... 45,595 46,407 45,980 ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $194,390 $189,779 $187,782 ======
See notes to consolidated financial statements.
F-3 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
WILSON GREATBATCH LTD. (PREDECESSOR) (NOTE 1) WILSON GREATBATCH TECHNOLOGIES, INC. ------THREE MONTHS JANUARY 1, YEAR ENDED ENDED 1997 JULY 11, 1997 ------TO TO JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, JULY 10, 1997 JANUARY 2, 1998 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) REVENUES...... $29,620 $ 26,282 $75,268 $76,590 $19,886 $22,526 COST OF GOODS SOLD...... 14,922 12,241 36,454 41,057 10,024 12,936 ------GROSS PROFIT...... 14,698 14,041 38,814 35,533 9,862 9,590 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...... 5,881 4,501 9,391 7,235 2,144 1,974 RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET...... 4,400 4,619 12,190 9,339 2,772 2,520 INTANGIBLE AMORTIZATION...... -- 1,810 5,197 6,510 1,638 1,627 TRANSACTION RELATED EXPENSES...... 11,097 ------WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH, DEVELOPMENT AND ENGINEERING...... -- 23,779 ------(6,680) (20,668) 12,036 12,449 3,308 3,469 ------INTEREST EXPENSE...... 252 4,128 10,572 13,420 3,298 3,985 OTHER (INCOME) EXPENSE...... (117) 74 364 1,343 74 61 ------INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE...... (6,815) (24,870) 1,100 (2,314) (64) (577) INCOME TAX EXPENSE (BENEFIT)...... 1,053 (9,468) 410 (605) (17) (184) ------INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE...... (7,868) (15,402) 690 (1,709) (47) (393) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX (Note 2)...... ------(563) (563) ------NET INCOME (LOSS)...... $(7,868) $(15,402) $ 690 $(2,272) $ (610) $ (393) ======BASIC EARNINGS (LOSS) PER SHARE Before cumulative effect of accounting change...... $ (874) $ (1.04) $ 0.04 $ (0.08) $ (0.00) $ (0.02) Basic earnings (loss) per share.... $ (874) $ (1.04) $ 0.04 $ (0.11) $ (0.03) $ (0.02) DILUTED EARNINGS (LOSS) PER SHARE Before cumulative effect of accounting change...... $ (874) $ (1.04) $ 0.04 $ (0.08) $ (0.00) $ (0.02) Diluted earnings (loss) per share...... $ (874) $ (1.04) $ 0.04 $ (0.11) $ (0.03) $ (0.02) WEIGHTED AVERAGE SHARES OUTSTANDING Basic...... 9 14,758 17,436 20,818 20,665 21,027 Diluted...... 9 14,758 18,173 20,818 20,665 21,027
See notes to consolidated financial statements.
F-4 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT SHARES)
SUBSCRIBED CAPITAL TREASURY SUBSCRIBED COMMON STOCK COMMON STOCK IN EXCESS RETAINED STOCK COMMON ------OF PAR EARNINGS ------STOCK SHARES AMOUNT SHARES AMOUNT VALUE (DEFICIT) SHARES AMOUNT RECEIVABLE ------Wilson Greatbatch Ltd. (Predecessor) (Note 1): BALANCE, JANUARY 1, 1997...... 8,839 $ 9 -- $ -- $ -- $ 12,235 -- $ -- $ -- Net loss...... ------(7,868) ------Dividends declared...... ------(1,130) ------Cash distributions to shareholders...... ------(1,119) ------Other distribution to shareholders...... ------(2,182) ------BALANCE, JULY 10, 1997...... 8,839 $ 9 -- $ -- $ -- $ (64) -- $ -- $ -- ======------Wilson Greatbatch Technologies, Inc.: BEGINNING BALANCE, JULY 10, 1997...... -- $ -- -- $ -- $ -- $ -- -- $ -- $ -- Capitalization of the Company.... 14,324,437 14 -- -- 42,959 ------Common stock issued...... 222,667 ------668 ------Subscribed common stock...... -- -- 561,333 1,684 ------1,684 Net loss...... ------(15,402) ------BALANCE, JANUARY 2, 1998...... 14,547,104 14 561,333 1,684 43,627 (15,402) -- -- 1,684 Shares issued in connection with the financing of Greatbatch- Hittman...... 5,500,000 6 -- -- 16,494 ------Shares issued under Employee Stock Ownership Plan...... 42,051 ------126 ------Exercise of stock options...... 13,267 ------40 ------Net income...... ------690 ------BALANCE, JANUARY 1, 1999...... 20,102,422 20 561,333 1,684 60,287 (14,712) -- -- 1,684 Common stock issued...... 110,895 ------998 ------Shares issued under Employee Stock Ownership Plan...... 232,451 ------2,092 ------Exercise of stock options...... 34,446 ------103 ------Purchase of common stock from former employees...... ------12,142 109 -- Net loss...... ------(2,272) ------BALANCE, DECEMBER 31, 1999...... 20,480,214 $ 20 561,333 $1,684 $63,480 $(16,984) 12,142 $109 $1,684 ======
See notes to consolidated financial statements.
F-5 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
WILSON GREATBATCH LTD. (PREDECESSOR)(NOTE 1) WILSON GREATBATCH TECHNOLOGIES, INC. ------PERIOD FROM PERIOD FROM YEAR YEAR THREE MONTHS THREE MONTHS JANUARY 1, 1997 JULY 11, 1997 ENDED ENDED ENDED ENDED TO TO JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, JULY 10, 1997 JANUARY 2, 1998 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)...... $(7,868) $ (15,402) $ 690 $(2,272) $ (610) $ (393) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Purchased in-process research and development...... -- 23,779 ------Depreciation and amortization...... 1,456 3,548 9,190 11,363 2,958 3,115 Deferred financing costs...... -- 248 699 972 227 232 Deferred compensation..... (1,616) 1,164 (824) (592) (288) (15) Deferred income taxes..... -- (9,750) (907) 1,685 17 -- Loss on disposal of assets...... 530 6 194 146 -- -- Valuation loss on investment held at cost...... ------859 -- -- Cumulative effect of accounting change...... ------563 563 -- Reserve for disposal of property...... -- -- 300 ------Changes in operating assets and liabilities: Accounts receivable...... (1,132) 1,766 (4,223) 947 564 556 Inventories...... 1,082 (1,871) (629) (292) 268 (1,134) Prepaid expenses and other assets...... 202 119 (57) (663) (892) (454) Accounts payable...... 688 68 (103) 251 (481) 253 Accrued liabilities...... 1,073 1,097 5,507 (4,241) (1,717) 2,351 Income taxes...... -- 222 (910) (1,826) (16) 120 ------Net cash (used in) provided by operating activities...... (5,585) 4,994 8,927 6,900 593 4,631 ------CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment..... (1,934) (2,656) (6,207) (8,452) (1,438) (1,918) Proceeds from sale of property, plant and equipment...... -- -- 80 5 -- -- Increase in intangible assets...... -- (850) (1,741) (570) (285) (267) Decrease (increase) in other long term assets...... -- (147) (2,569) 170 -- -- Acquisition of subsidiary, net of cash acquired.... -- -- (72,938) ------Net cash used in investing activities...... (1,934) (3,653) (83,375) (8,847) (1,723) (2,185) ------CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under line of credit, net...... 11,677 200 (700) 4,300 -- (2,150) Proceeds from long-term debt...... (488) (1,800) 61,853 ------Proceeds from debt and equity financing (Note 1)...... -- 115,285 ------Payments to acquire Predecessor (Note 1).... -- (115,285) ------Equity investment in Company...... -- 668 ------Scheduled payments of long-term debt...... -- -- (775) -- (775) (1,650) Prepayments of long-term debt...... -- -- (775) (2,950) -- -- Acquisition earnout payment...... ------(2,764) -- -- Cash dividends paid...... (920) ------Cash distributions to shareholders...... (2,419) ------Purchase of treasury stock...... ------(109) -- (35) Issuance of capital stock...... -- -- 16,666 3,193 ------Net cash provided by (used in) financing activities...... 7,850 (932) 76,269 1,670 (775) (3,835) ------NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 331 409 1,821 (277) (1,905) (1,389) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 54 1,910 2,319 4,140 4,140 3,863 ------CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 385 $ 2,319 $ 4,140 $ 3,863 $ 2,235 $ 2,474 ======
See notes to consolidated financial statements.
F-6 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS
THE ENTITY--The consolidated financial statements include the accounts of Wilson Greatbatch Technologies, Inc., a holding company, and its wholly-owned subsidiary Wilson Greatbatch Ltd. (collectively, the "Company"). The Company is comprised of its operating companies, Wilson Greatbatch Ltd. and its wholly-owned subsidiary, Greatbatch-Hittman, Inc. ("Hittman"). All significant intercompany balances and transactions have been eliminated.
On July 10, 1997, the Company acquired all of the outstanding shares of Wilson Greatbatch Ltd. (the "Predecessor") in a leveraged buyout. Equity financing was provided by entities affiliated with DLJ Merchant Banking Partners II, L.P. ("DLJMB"), an affiliate of Donaldson, Lufkin and Jenrette Securities Corporation ("DLJ"). DLJMB acquired approximately 86.4% of the outstanding capital stock of the Company. Debt financing was provided by a variety of lenders, including DLJ Capital Funding, Inc., also an affiliate of DLJ.
The leveraged buyout was accounted for under the purchase method of accounting. Accordingly, the $115.3 million purchase price was allocated to the net assets acquired based on their estimated fair values. The excess of purchase price over fair value of the net tangible assets acquired was $79.1 million of which $23.8 million was allocated to purchased in-process research, development and engineering and $55.3 million was allocated to other intangible assets. The purchased in-process research, development and engineering were immediately charged to expense upon acquisition. Other intangible assets included the following (dollars in thousands):
Goodwill...... $ 6,124 Trademark and Names...... 22,860 Patented Technology...... 13,990 License Agreement...... 6,190 Assembled Workforce...... 6,180 ------Total...... $55,344 ======
F-7 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS (CONTINUED)
In-process research, development and engineering included the following (dollars in thousands):
YEAR WHEN MATERIAL NET RISK- CASH IN-FLOWS ADJUSTED EXECTED TO DISCOUNT BEGIN RATE ------Medical: Capacitor...... 1998 20% $4,036 Next Generation ICD...... 1998 35% 7,004 Titanium Carbon Monofluoride...... 1998 20% 1,204 High Value Carbon Monofluoride Cell...... 1999 20% 397 Lithium Ion Products...... 1999 35% 3,216 Pharmatarget & Minimed Project (09 Pump)...... 1998 35% 2,253 Other...... 1999 N/A 640
Commercial: 200 Degree Cell & MWD DD Cell...... 1998 20% 305
Greatbatch Scientific: Medical Products...... 1998 35% 4,724 ------$23,779 ======
The above-noted technology refers to the product development activities related to the design and manufacture of future Company products. It includes those products or product enhancements which management believes were currently in development and were part of the Company's strategy to increase its dominance of the implantable defibrillators and pacemaker battery market. Such in-process technology was determined by management to have no alternative future use. To value the in-process technology, management of the Company utilized the discounted cash flow method.
The statements of operations, stockholders' equity and cash flows and the notes to the financial statements include activity separately identified for the period from January 1, 1997 to July 10, 1997 that pertain to the Predecessor.
In connection with the leveraged buyout, approximately $11.1 million of nonrecurring costs and expenses were incurred and charged to expense by Predecessor for the period from January 1, 1997 to July 10, 1997. These nonrecurring costs and expenses include the following: (a) payments totaling $4.9 million made to employees and Board members pursuant to the leveraged buyout agreement; (b) payments totaling $5.6 million representing commissions and fees as a result of the sale of Predecessor; and (c) the write-off of $0.6 million of construction in progress.
NATURE OF OPERATIONS --The Company operates in two reportable segments--medical and commercial power sources. The medical segment designs and manufactures power sources, capacitors and components used in implantable medical devices. The commercial power sources segment designs
F-8 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS (CONTINUED) and manufactures non-medical power sources for use in aerospace, oil and gas exploration and oceanographic equipment.
On May 18, 2000, the Board of Directors authorized a one for three reverse stock split to holders of record on May 19, 2000. All share and per share data, including stock option information for the Company, has been restated to reflect the reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS--The accompanying consolidated balance sheet as of March 31, 2000, statements of operations and cash flows for the three months ended April 2, 1999 and March 31, 2000 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation for results of these interim periods. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of results to be expected for the entire year or for any other period.
ACCOUNTING CHANGE--In April 1998, the AICPA issued Statement of Position ("SOP") 98-5, "Reporting the Costs of Start-Up Activities." This statement requires that start-up costs, including organization costs, capitalized by the Company prior to January 2, 1999, be written off and any future start-up costs be expensed as incurred. The Company adopted this SOP in 1999. The total amount of deferred start- up costs reported as a cumulative effect of change in accounting principle was $939,000, net of tax benefits of $376,000.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities of three months or less.
INVENTORIES--Inventories include raw materials, work-in-process and finished goods and are stated at the lower of cost (as determined by the first-in, first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is carried at cost. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets, which are as follows: buildings and building improvements 7-40 years; machinery and equipment 3-10 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred. Renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recorded in income or expense. The Company continually reviews plant and equipment to determine that the carrying values have not been impaired.
INTANGIBLE ASSETS-- Intangible assets include goodwill and other identifiable intangible assets, which were derived in connection with the Company's acquisition of the Predecessor and Hittman. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 40 years. Other identifiable intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from 6 to 40 years, except for deferred financing costs which are being amortized using the effective yield method over the life of
F-9 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the underlying debt. The Company continually reviews these intangible assets for potential impairment by assessing significant decreases in the market value, a significant change in the extent or manner in which an asset is used or a significant adverse change in the business climate. The Company measures expected future cash flows and compares to the carrying amount of the asset to determine whether any impairment loss is to be recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair value of cash and cash equivalents approximates their recorded values due to the nature of the instruments. The floating rate debt carrying value approximates the fair value based using the floating interest rate resetting on a regular basis. The fixed rate long-term debt carrying value approximates fair value.
The fair value of the interest rate cap agreements are estimated by obtaining quotes from brokers and represents the cash requirement if the existing contract has been settled at year end. The notional amount, fair value and carrying amount of the Company's interest rate cap agreements were approximately $54.1 million and $79.1 million; $196,000 and $515,300; and $254,500 and $229,100, as of January 1, 1999 and December 31, 1999, respectively.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade receivables. A significant portion of the Company's sales are to customers in the medical industry, and, as such, the Company is directly affected by the condition of that industry. However, the credit risk associated with trade receivables is minimal due to the Company's stable customer base and ongoing control procedures, which monitor the creditworthiness of customers.
The credit risk associated with the Company's interest rate cap agreements is not considered significant due to the creditworthiness of the counterparties.
DERIVATIVE FINANCIAL INSTRUMENTS-- The Company has only limited involvement with derivative financial instruments and does not enter into financial instruments for trading purposes. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. Premiums paid for purchased interest rate cap agreements are amortized over the terms of the caps and recognized as interest expense. Unamortized premiums are included in other assets in the consolidated balance sheets. Amounts receivable under interest rate cap agreements are accrued as a reduction of interest expense. At December 31, 1999, the Company was a party to three interest rate cap agreements (see Note 8).
STOCK OPTION PLAN--The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." As permitted in that standard, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," and related interpretations. In the absence of a "regular, active public market," the fair market value of the common stock has been determined by the Board of Directors. The most recent independent valuation of the Company stock was performed in May 1999 as of December 31, 1998.
F-10 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES--The Company provides for income taxes using the liability method whereby deferred tax liabilities and assets are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using the anticipated tax rate when taxes are expected to be paid or reversed.
REVENUE RECOGNITION--Revenues are recognized when the products are shipped to customers.
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS--Research, development and engineering costs are expensed as incurred. The Company recognizes cost reimbursements from customers for whom the Company designs products upon achieving milestones related to designing batteries and capacitors for their products. The cost reimbursements charged to customers represent actual costs incurred by the Company in the design and testing of prototypes built to customer specifications. This cost reimbursement includes no mark-up and is recorded as an offset to research, development and engineering costs.
Net research, development and engineering costs for the periods from January 1, 1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999 are as follows (dollars in thousands):
PREDECESSOR ------JANUARY 1, 1997 JULY 11, 1997 TO TO JULY 10, 1997 JANUARY 2, 1998 1998 1999 ------Gross research, development and engineering costs...... $5,980 $5,765 $15,580 $11,885 Less cost reimbursements...... (1,580) (1,146) (3,390) (2,546) ------Research, development and engineering costs, net...... $4,400 $4,619 $12,190 $ 9,339 ======
EARNINGS (LOSS) PER SHARE ("EPS")--Basic earnings per share is calculated by dividing net income (loss) by the average number of shares outstanding during the period. Diluted earnings per share is calculated by adjusting for common stock equivalents, which consist of stock options. During the period from July 11, 1997 to January 2, 1998, the year ended December 31, 1999, there were 441,000 and 848,000 stock options, respectively, that have not been included in the computation of diluted EPS because to do so would be antidilutive for such periods. Diluted earnings per share for the year ended January 1, 1999 includes the potentiality dilutive effect of stock options. For the period from January 1, 1997 to July 10, 1997, the Predecessor was a subchapter S corporation and therefore EPS has not been included.
COMPREHENSIVE INCOME--Comprehensive income includes all changes in stockholders' equity during a period except those resulting from investments by owners and distribution to owners. For all periods presented, the Company's only component of comprehensive income is its net income (loss) for those periods.
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
F-11 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS--The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in 1999. SFAS No. 131 establishes standards for reporting information about operating and related disclosures about products and services, geographical areas and major customers. The adoption of SFAS No. 131 did not effect the Company's financial position, results of operations or cash flows, but did affect the disclosure of segment information.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity," which, as amended, is required to be adopted by the Company in 2001. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges of underlying transactions must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined the effect SFAS No. 133 will have, if any, on the Company's consolidated financial position, results of operations or cash flows.
SUPPLEMENTAL CASH FLOW INFORMATION--Cash paid for interest from January 1, 1997 to July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999 was approximately $275,000, $1,992,000, $9,150,000 and $13,790,000, respectively. Cash paid for income taxes from January 1, 1997 to July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999 was approximately $17,000, $-0-, $1,482,000 and $186,000, respectively.
FINANCIAL STATEMENT YEAR END--The Company's year end is the closest Friday to December 31. Fiscal 1999 and 1998 included 52 weeks.
3. ACQUISITION
On August 7, 1998, Wilson Greatbatch Ltd. acquired all of the issued and outstanding shares of Hittman, formerly Hittman Materials and Medical Components, Inc., for a total purchase price of $71.8 million. Of the total purchase price, $69.0 million was paid in cash at the date of acquisition. The remaining purchase price was contingent upon Hittman achieving certain financial targets in 1998 and 1999. Approximately $2.8 million of the contingent consideration was incurred in fiscal 1998, paid in 1999, and allocated to the purchase price. There is no additional contingent consideration to be incurred.
The acquisition was recorded under the purchase method of accounting and accordingly, the results of the operations of Hittman have been included in the consolidated financial statements from the date of acquisition. The purchase price has been allocated to assets acquired and liabilities assumed based on the fair value at the date of acquisition. The excess of the purchase price over fair value of the net assets acquired was approximately $67.7 million, of which $17.4 million was allocated to
F-12 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
3. ACQUISITION (CONTINUED) identifiable intangible assets and $50.3 million was allocated to goodwill. Identifiable intangible assets included the following (dollars in thousands):
Hittman Trademark...... $ 6,800 Proprietary Technology...... 3,200 Noncompetition/Employment Agreements...... 5,600 Assembled Workforce...... 1,200 Other...... 600 ------Total...... $17,400 ======
4. INVENTORIES
Inventories consisted of the following (dollars in thousands):
JANUARY 1, DECEMBER 31, MARCH 31, 1999 1999 2000 ------(UNAUDITED) Raw material...... $ 6,033 $ 7,099 $ 7,309 Work-in-process...... 6,016 5,089 5,306 Finished goods...... 1,242 1,395 2,102 ------Total...... $13,291 $13,583 $14,717 ======
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant, and equipment consisted of the following (dollars in thousands):
JANUARY 1, DECEMBER 31, 1999 1999 ------Land and land improvements...... $ 2,227 $ 2,227 Buildings and building improvements...... 4,974 5,226 Leasehold improvements...... 1,348 2,243 Machinery and equipment...... 20,630 26,153 Furniture and fixtures...... 1,552 1,628 Computers and information technology...... 1,893 2,259 Other...... 1,749 2,863 ------34,373 42,599 Less accumulated depreciation...... (4,878) (9,042) ------Total...... $29,495 $33,557 ======
Depreciation expense for the period from January 1, 1997 to July 11, 1997, from July 11, 1997 to January 2, 1998 in 1998 and 1999 was approximately $1,441,000, $1,586,000, $3,532,000 and $4,240,000, respectively.
F-13 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
6. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following (dollars in thousands):
JANUARY 1, DECEMBER 31, 1999 1999 ------Goodwill, net of accumulated amortization of $2,229 and $824...... $ 55,028 $ 53,944 Trademark and names, net of accumulated amortization of $1,685 and $944...... 28,817 27,975 Patented technology, net of accumulated amortization of $2,824 and $1,696...... 11,734 10,606 License agreement, net of accumulated amortization of $2,579 and $1,548...... 4,642 3,611 Assembled workforce, net of accumulated amortization of $1,468 and $833...... 6,548 5,912 Noncompete/employment agreement, net of accumulated amortization of $1,400 and $467...... 5,133 4,200 Unpatented proprietary technology, net of accumulated amortization of $976 and $340...... 3,060 2,224 Patent licenses, net of accumulated amortization of $312 and $142...... 198 295 Deferred financing costs, net of accumulated amortization of $1,746 and $922...... 4,730 3,906 Organizational costs, net of accumulated amortization of $286 at January 1, 1999 (Note 2)...... 939 -- Interest rate cap agreements...... 71 229 ------Total...... $120,900 $112,902 ======
The estimated useful lives of the significant intangible assets are as follows:
IN YEARS ------Goodwill...... 40 Trademark and names...... 40 Patented technology...... 12 Assembled workforce...... 10-12 Other intangibles...... 3-10
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (dollars in thousands):
JANUARY 1, DECEMBER 31, 1999 1999 ------Profit sharing...... $ 2,749 $ 1,105 Interest...... 2,350 931 Salaries and benefits...... 4,688 3,832 Contingent consideration for Hittman acquisition (Note 3)...... 2,764 -- Other...... 1,597 1,271 ------Total...... $ 14,148 $ 7,139 ======
F-14 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
JANUARY 1, DECEMBER 31, 1999 1999 ------(DOLLARS IN THOUSANDS) Term A Facility, $50.0 million, due September 30, 2004. Quarterly principal installments due of $0.625 million in December 1998 through September 1999, $1.25 million through September 2000, $1.875 million through September 2002, $3.125 million through September 2003, and $3.75 million through September 2004. Interest payments are due quarterly and charged, at the Company's option, based on either prime plus 1.50% or LIBOR plus 2.75% as per the credit agreement (prime was 8.50% and LIBOR was 7.69% at January 1, 2000). Interest rate requirements varied from the above through the Waiver Period, as discussed below...... $ 48,750 $ 46,250 Term B Facility, $60.0 million, due September 30, 2006. Quarterly principal installments due of $150,000 through September 2005 and $1.395 million through September 2006. Interest payments are due quarterly and charged, at the Company's option, based on either prime plus 1.75% or LIBOR plus 3.00% as per the credit agreement. Interest rate requirements varied from the above through the Waiver Period, as discussed below...... 59,700 59,250 Revolving Facility, up to $20.0 million, due September 30, 2004. Borrowing limited to $8 million through waiver period. Interest payments are due quarterly on any outstanding loans and charged, at the Company's option, based on either prime plus 1.50% or LIBOR plus 2.75% as per the credit agreement. Interest rate requirements varied from the above through the Waiver Period, as discussed below...... -- 4,300 Senior Subordinated Notes, principal amount of Notes of $25.0 million due July 1, 2007. Semi-annual interest installments are due to note holders on January 1 and July 1 of each year...... 22,283 22,602 Other long-term obligations...... 553 811 ------131,286 133,213 Less current maturities of long-term obligations...... (2,950) (6,225) ------Long-term obligations...... $128,336 $126,988 ======
In July 1997, the Company entered into a Credit Agreement with various financial institutions providing a maximum of $60.0 million in senior, first-secured financing. In August 1998, this agreement was amended and restated to facilitate the Greatbatch-Hittman acquisition, and the maximum senior, first secured financing was increased to $130.0 million (the "Agreement"). The Agreement provides for two term facilities ("Term A Facility" and "Term B Facility") and a revolving credit facility ("Revolving Facility"). No gain or loss was recorded as a result of the amended and restated Agreement.
Also, in July 1997, the Company issued $25.0 million, 13% Senior Subordinated Notes (the "Senior Subordinated Notes") to various affiliates of DLJ and third parties and received $25.0 million related
F-15 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS (CONTINUED) to the issuance. At maturity, July 1, 2007, the entire principal amount of the Senior Subordinated Notes, $25.0 million, will be payable to the holders of the Senior Subordinated Notes. At the date of inception, the Company recorded $21,811,688 as its obligation due to lenders and $3,188,312 for shares issued to the lenders. The difference between the face amount of the Senior Subordinated Notes and the recorded book value is amortized under the effective yield method and will be charged to interest expense over the term of the Senior Subordinated Notes. The effect of this transaction resulted in an effective interest rate of 14.3% for the period from July 11, 1997 to January 2, 1998, 1998 and 1999. Payments are subordinated to amounts due under the Agreement. In connection with the issuance of the Senior Subordinated Notes, the Company issued 1,062,771 shares to the holders of the Senior Subordinated Notes.
The Revolving Facility includes the availability to the Company of up to $20.0 million in the form of either revolving loans, swing-line loans, or letters of credit. The swing-line loans and letters of credit may not exceed $2.0 million and $5.0 million, respectively. The Revolving Facility is due September 30, 2004. There was $4.3 million outstanding at December 31, 1999 and no balance outstanding at January 1, 1999.
Interest is payable quarterly on any outstanding loans and charged, at the Company's option, based on either prime or LIBOR plus an interest rate add-on ("Applicable Margin"). For the Term A Facility and the Revolving Facility, the Applicable Margin is 1.50% for prime rate loans and 2.75% for LIBOR rate loans. For the Term B Facility, the Applicable Margin is 1.75% and 3.00% for prime rate and LIBOR rate loans, respectively (see Note 18).
The Applicable Margin with respect to the Term A Facility and the Revolving Facility may be reduced, depending upon the Company's degree of leverage, as defined. The Applicable Margin is reduced in accordance with a matrix setting forth leverage ratios and corresponding Applicable Margins.
The Agreement for the Term A Facility, Term B Facility and the Revolving Facility contains, among other covenants, quarterly and annual financial covenants pertaining to minimum earnings, interest coverage, leverage and other ratios. In November 1999, the Agreement was amended to change and waive compliance with covenants. The Company was not in compliance at December 31, 1999 with the financial covenants relating to the Leverage Ratio and Interest Coverage Ratio contained in Section 7.2.4 (b) and Section 7.2.4 (c), respectively, of the Agreement. The Company has obtained waivers from the lending institutions for the aforementioned financial covenants for the period from November 15, 1999 to February 15, 2000 (the "Waiver Period"). In addition, during the Waiver Period, the Applicable Margins referred to above were all increased prospectively by 75 basis points and the Revolving Facility was limited to a maximum outstanding of $8.0 million. During the Waiver Period, the Company was restricted from making loans, investments and capital stock redemptions (see Note 18).
The Company has three outstanding interest rate cap agreements with three financial institutions. The Credit Agreement requires the Company to provide interest rate protection on at least 50% of the related senior credit facility. To meet this requirement, in December 1997, December 1998, and January 1999, the Company hedged $24.1 million, $30.0 million, and $25.0 million respectively of the outstanding Term A Facility and Term B Facility. The 1997 agreement caps LIBOR for a portion of the Term A Facility and the Term B Facility at 7% through December 2000. The 1998 and 1999 agreements cap LIBOR for a portion of the Term A Facility and the Term B Facility at 6% through January 2002.
F-16 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
8. LONG-TERM OBLIGATIONS (CONTINUED)
Maturities of long-term obligations subsequent to December 31, 1999 are as follows (dollars in thousands):
2000...... $ 6,225 2001...... 8,600 2002...... 9,350 2003...... 13,725 2004...... 16,150 Thereafter...... 81,561 ------Total of long-term maturities...... 135,611 Amount to be amortized to debt on the Senior Subordinated Notes...... (2,398) ------Total...... $133,213 ======
9. INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS
INCENTIVE COMPENSATION PLANS--The Company sponsors various incentive compensation programs, which provide for the payment of cash to key employees based upon achievement of specific earnings goals before incentive compensation expense.
The scheduled payment terms of the deferred compensation plans subsequent to December 31, 1999 are as follows (dollars in thousands):
2000...... $ 680 2001...... 621 2002...... 14 ------1,315 Less current maturities of deferred compensation (included in accrued liabilities)...... (680) ------Long-term portion of deferred compensation...... $ 635 ======
EMPLOYEE STOCK OWNERSHIP PLAN--The Company sponsors an Employee Stock Ownership Plan ("ESOP") and related trust as a long-term benefit for substantially all of its employees as defined in the plan documents. Under the ESOP, there are two components to ESOP contributions. The first component is a defined contribution pension plan whose annual contribution equals five percent of each employee's compensation. Contributions to the ESOP are in the form of Company stock.
The second component is a discretionary profit sharing contribution as determined by the Board of Directors. This profit sharing contribution is to be contributed to the ESOP in the form of Company stock. The ESOP is subject to contribution limitations and vesting requirements as defined in the plan.
As of December 31, 1999, the Company had issued 269,432 shares under the ESOP and was obligated to issue an additional 120,778 shares under the ESOP.
F-18 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
9. INCENTIVE COMPENSATION AND EMPLOYEE BENEFIT PLANS (CONTINUED) SAVINGS PLAN--The Company sponsors a defined contribution 401(k) plan, which covers substantially all of its employees. The plan provides for the deferral of employee compensation under Section 401(k) and a Company match. Net pension costs related to this defined contribution pension plan were approximately $57,000, $51,000, $477,500 and $429,000 from January 1, 1997 to July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999, respectively.
Total costs to the Company for all of the above plans were approximately $1,908,000, $1,384,000, $4,118,000 and $1,946,000 from January 1, 1997 to July 10, 1997, from July 11, 1997 to January 2, 1998, in 1998 and 1999, respectively.
10. STOCK OPTION PLANS
The Company has two stock option plans, which provide for the issuance of nonqualified and incentive stock options to employees of the Company. The Company's 1997 Stock Option Plan ("1997 Plan") authorizes the issuance of options to purchase up to 800,000 shares of common stock of the Company. The stock options generally vest over a five year period and may vary depending upon the achievement of earnings targets. The stock options expire 10 years from the date of the grant. Stock options are granted at exercise prices equal to the fair market value of the Company's common stock at the date of the grant.
The Company's 1998 Stock Option Plan ("1998 Plan") authorizes the issuance of nonqualified and incentive stock options to purchase up to 2,033,333 shares of common stock of the Company, subject to the terms of the plan. The stock options vest over a three to five year period and may vary depending upon the achievement of earnings targets. The stock options expire 10 years from the date of the grant. Stock options are granted at exercise prices equal to the fair value of the Company's common stock at the date of the grant.
As of December 31, 1999, options for 1,935,192 shares were available for future grants under the two plans. The weighted average remaining contractual life is seven years.
The Compensation Committee of the Board of Directors has determined the fair value of the stock options granted in 1999 and 1998. In the absence of a "regular, active public market," and based in part on an independent valuation of the Company's stock as of December 31, 1998 and consideration of comparable companies, the fair value of the common stock underlying stock options granted in fiscal 1999 was estimated to be $9.00 per share. The fair value of the common stock underlying stock options granted in fiscal 1998 was estimated to be $3.00 per share.
F-19 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
10. STOCK OPTION PLANS (CONTINUED) A summary of the transactions under the 1997 Plan and 1998 Plan for the period from July 11, 1997 to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999 follows (there were no options prior to July 11, 1997):
OPTIONS WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE ------Balance at July 11, 1997...... -- $ -- Options granted...... 706,000 3.00 Options exercised...... -- -- Options forfeited...... ------Balance at January 2, 1998...... 706,000 3.00 Options granted...... 95,512 3.00 Options exercised...... (13,266) 3.00 Options forfeited...... (28,400) 3.00 ------Balance at January 1, 1999...... 759,846 3.00 Options granted...... 230,762 9.00 Options exercised...... (34,447) 3.00 Options forfeited...... (105,733) 3.45 ------Balance at December 31, 1999...... 850,428 $4.56 ======Options exercisable at: January 1, 1999...... 229,019 $3.00 December 31, 1999...... 222,208 $4.23
Of the options outstanding as of December 31, 1999, 725,399 options were outstanding at a range of exercise prices of $3.00 to $3.45, which approximated their weighted average exercise price. As of March 31, 2000, there were 967,028 options outstanding.
No compensation cost has been recognized in the financial statements because the option exercise price was equal to the estimated fair market value of the underlying stock on the date of grant. The weighted average grant date fair value of options granted was $3.00 for the period from July 11, 1997 to January 2, 1998, $9.00 for the year ended January 1, 1999 and $9.00 for the year ended December 31, 1999.
The Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS 123. The binomial option pricing model was used with the following weighted average assumptions for fiscal 1999: risk free interest rate of 6.55%; no dividend yield; expected common stock market price volatility factor of effectively zero; and a weighted average expected life of the options of 7 years. As prescribed by SFAS 123, pro forma net income (loss), basic and diluted earnings (loss) per share would have been $(15,480,000), $(1.05), $(1.05); $600,000, $0.03, $0.03; and $(2,975,000), $(0.14), $(0.14) for the period from July 11, 1997 to January 2, 1998 and for 1998 and 1999, respectively. These pro forma calculations assume the common stock is freely tradeable and as such, the impact is not necessarily indicative of the effects on reported net income of future years.
F-20 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
11. INCOME TAXES
The components of income tax expense (benefit) attributable to continuing operations for the periods from January 1, 1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999, consisted of the following (dollars in thousands):
PREDECESSOR ------JANUARY 1, 1997 JULY 11, 1997 TO TO JULY 10, 1997 JANUARY 2, 1998 1998 1999 ------Federal: Current...... $ 412 $ 222 $ 580 $ (702) Deferred...... -- (8,514) (129) 685 ------412 (8,292) 451 (17) ------State: Current...... 641 60 142 (1,588) Deferred...... -- (1,236) (183) 1,000 ------641 (1,176) (41) (588) ------Income tax expense (benefit)..... $1,053 $(9,468) $ 410 $ (605) ======
The Federal and state taxes associated with the Predecessor (a former S corporation) are directly attributable to the sale of its assets to the Company (see Note 1).
The net deferred tax asset includes the following (dollars in thousands):
JANUARY 1, DECEMBER 31, 1999 1999 ------Deferred tax asset--current...... $ 1,669 $1,520 Deferred tax asset--non current...... 8,988 7,828 ------Net deferred tax asset...... $10,657 $9,348 ======
F-21 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
11. INCOME TAXES (CONTINUED) The tax effect of major temporary differences that give rise to the Company's net deferred tax asset are as follows (dollars in thousands):
JANUARY 1, DECEMBER 31, 1999 1999 ------Allowance for obsolete inventory and Uniform Capitalization...... $ 677 $ 687 Accrued liabilities and deferred compensation...... 859 751 Amortization of intangible assets...... 7,775 7,249 Depreciation...... (731) (1,507) Restructuring reserves...... 230 153 Tax credits...... 1,761 559 Net operating loss carryforward...... -- 1,430 Other...... 86 26 ------Net deferred tax asset...... $10,657 $ 9,348 ======
The net deferred tax asset of $7,775,000 at January 1, 1999 and $7,249,000 at December 31, 1999 ascribed to the amortization of intangible assets is primarily attributable to the July 11, 1997 to January 2, 1998 expensing of purchased in-process research, development and engineering costs.
The provision for income taxes differs in each of the periods and years from the federal statutory rate due to the following:
JULY 11, 1997 TO JANUARY 2, 1998 1998 1999 ------Statutory rate...... 35% 35% 35% State taxes...... 3 15 (30) Federal and state tax credits...... -- (14) 20 Other...... -- 1 1 ------Effective tax rate...... 38% 37% 26% ======
12. CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares of common stock, $.001 par value per share. Dividends are not permitted until conditions under the senior secured debt agreement are satisfied, including payment in full of such senior debt obligations. Holders of common stock have one vote per share.
Subscribed common stock receivable consists of promissory notes, bearing interest at 6.4% (the "Applicable Federal Rate" at the time the notes were issued) extended by the Company to management stockholders to facilitate the purchase of 561,333 shares of common stock. The amounts under this arrangement are due November 2007.
F-22 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
12. CAPITAL STOCK (CONTINUED)
On the date of the acquisition of Hittman (See Note 3), existing stockholders, who had participated in the leveraged buyout, purchased 5,500,000 additional shares of common stock at $3.00 per share.
13. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal course of business. The Company does not believe that any such pending activities should have a material adverse effect on its results of operations or financial position.
The Company is a party to various license agreements through 2003 to manufacture and sell components for use in medical implants and various commercial applications.
OPERATING LEASES--The Company is a party to various operating lease agreements for office and manufacturing space. The Company incurred operating lease expense of $53,000, $53,000, $621,000 and $807,000 the period January 1, 1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and in 1998 and 1999, respectively. Included in this amount is $43,000, $43,000, $83,655 and $211,000 paid in the period January 1, 1997 to July 10, 1997 and July 11, 1997 to January 2, 1998 and in 1998 and 1999, respectively to a related party under a non- cancelable operating lease which expires in 2006.
If all lease extension options are exercised as expected by Company management, minimum future annual operating lease payments over the next five years for the Company are $724,000 in 2000; $704,000 in 2001; $702,000 in 2002; $477,000 in 2003; and $405,000 in 2004.
14. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: medical and commercial power sources. The medical segment designs and manufactures power sources, capacitors and components used in implantable medical devices, which are instruments that are surgically inserted into the body to provide diagnosis or therapy. The commercial power sources segment designs and manufactures non- medical power sources for use in aerospace, oil and gas exploration and oceanographic equipment.
The Company's medical segment includes three product lines that have been aggregated because they share similar economic characteristics and similarities in the areas of products, production processes, types of customers, methods of distribution and regulatory environment. The three product lines are implantable power sources, capacitors and medical components.
The reportable segments are separately managed, and their performance is evaluated based on income from operations. Management defines segment income from operations as gross profit less costs and expenses attributable to segment specific selling, general and administrative and research, development and engineering. Non-segment specific selling, general and administrative, research, development and engineering, interest expense, intangible amortization and non-recurring items are not allocated to reportable segments. Revenues from transactions between the two segments are not
F-23 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
14. BUSINESS SEGMENT INFORMATION (CONTINUED) significant. The accounting policies of the segments are the same as those described in Note 2. All dollars are in thousands.
WILSON GREATBATCH LTD. (PREDECESSOR) WILSON GREATBATCH TECHNOLOGIES, INC. ------PERIOD FROM PERIOD FROM JANUARY 1, JULY 11, 1997 1997 YEAR YEAR THREE MONTHS THREE MONTHS TO TO ENDED ENDED ENDED ENDED JULY 10, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, 1997 1998 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) Revenues: Medical...... $24,243 $ 19,908 $ 62,356 $ 66,579 $ 17,281 $ 20,196 Commercial power sources...... 5,377 6,374 12,912 10,011 2,605 2,330 ------Total revenues...... $29,620 $ 26,282 $ 75,268 $ 76,590 $ 19,886 $ 22,526 ======Segment income from operations: Medical...... $11,213 $ 10,213 $ 26,834 $ 26,359 $ 7,379 $ 6,849 Commercial power sources...... 1,560 2,590 4,303 2,711 707 604 ------Total segment income from operations...... 12,773 12,803 31,137 29,070 8,086 7,453 Unallocated...... (19,588) (37,673) (30,037) (31,384) (8,150) (8,030) ------Income (loss) before income taxes...... $(6,815) $(24,870) $ 1,100 $ (2,314) $ (64) $ (577) ======Expenditures for tangible long-lived assets: Medical...... $ 1,112 $ 994 $ 2,129 $ 6,700 $ 1,085 $ 1,875 Commercial power sources...... 24 79 136 72 10 3 ------Total reportable segments...... 1,136 1,073 2,265 6,772 1,095 1,878 Unallocated long-lived tangible assets...... 798 1,583 3,942 1,680 343 40 ------Consolidated expenditures...... $ 1,934 $ 2,656 $ 6,207 $ 8,452 $ 1,438 $ 1,918 ======
JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) Identifiable assets, net: Medical...... $ 34,481 $ 42,236 $ 34,024 $ 44,938 Commercial power sources...... 5,959 5,068 6,162 4,113 ------Total reportable segments...... 40,440 47,304 40,186 49,051 Unallocated assets...... 153,950 142,475 151,748 138,731 ------Consolidated total assets...... $194,390 $189,779 $191,934 $187,782 ======
F-24 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
Net revenues by geographic area are presented by attributing revenues based upon the location from external customers on the basis of where the products are sold. All dollars are in thousands.
WILSON GREATBATCH LTD. (PREDECESSOR) WILSON GREATBATCH TECHNOLOGIES, INC. ------PERIOD FROM PERIOD FROM JANUARY 1, JULY 11, 1997 1997 YEAR YEAR THREE MONTHS THREE MONTHS TO TO ENDED ENDED ENDED ENDED JULY 10, JANUARY 2, JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, 1997 1998 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) Revenues by geographic area: United States...... $23,006 $20,035 $ 58,824 $ 55,999 $ 14,504 $ 15,697 Foreign countries...... 6,614 6,247 16,444 20,591 5,382 6,829 ------Consolidated net revenues...... $29,620 $26,282 $ 75,268 $ 76,590 $ 19,886 $ 22,526 ======
JANUARY 1, DECEMBER 31, APRIL 2, MARCH 31, 1999 1999 1999 2000 ------(UNAUDITED) (UNAUDITED) Long-lived assets: United States...... $162,402 $156,409 $162,562 $155,079 Foreign countries...... ------Consolidated long-lived assets...... $162,402 $156,409 $162,562 $155,079 ======
Two customers accounted for approximately 28%, 46%, 38% and 66% of sales for the period from January 1, 1997 to July 10, 1997, the period from July 11, 1997 to January 2, 1998 and the years ended January 1, 1999 and December 31, 1999, respectively. As of December 31, 1999, two customers accounted for approximately 62% of the outstanding accounts receivable.
15. SALE OF ASSETS
In August 1998, the Company sold the assets of a product line, Greatbatch-Scientific, to a third party in exchange for shares of stock of the third party. Greatbatch-Scientific sales were not significant to the consolidated financial statements. As a result of this transaction, the Company recorded the shares of stock acquired as an investment carried at cost, which approximated $2.4 million. Cost of the assets sold approximated fair value and accordingly, no gain or loss was recorded in the accompanying consolidated financial statements as of the date of sale. The investment is included in other assets on the consolidated balance sheet. The cost method is used to account for the Company's investment because the Company does not have the ability to exercise significant influence over the investee's operating and financial policies. Management intends for this investment to be long-term. As of December 31, 1999, a $859,000 impairment of this investment was recorded in fiscal 1999. The write-down of the investment represents an other than temporary decline and was based upon the
F-25 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
15. SALE OF ASSETS (CONTINUED)
Company's monitoring of this investment and publicly available information from a local newspaper related to an unrelated public venture capital company.
16. RESTRUCTURING
In October 1998, management of the Company initiated a plan to restructure Engineered Components ("EC"), a product line of the Company's medical segment. EC ceased the production of non-medical products to concentrate on its core customer base. The restructuring is not expected to significantly impact future operations. A total of $825,000 in restructuring costs were charged to operations in fiscal 1998. Such restructuring costs included the following (dollars in thousands):
Estimated unsaleable inventory...... $350 Losses from the planned disposal of equipment and leases on equipment...... 400 Severance pay and benefits to employees...... 75 ---- $825 ====
Approximately $585,000 of restructuring costs are included in other accrued liabilities at January 1, 1999. Approximately $285,000 was paid in 1999 and the remaining amount is expected to be paid during 2000.
17. RELATED PARTY TRANSACTIONS
The Company had amounts due from related parties totaling $1,684,000 at January 1, 1999 and December 31, 1999, respectively. Amounts due from related parties is composed of notes receivable from executive officers and key employees in connection with their purchase in 1997 of shares of the Company's common stock. The notes receivable are due in November 2007 and bear interest at 6.42% per annum. Payments of interest commenced on May 1, 1998 and are due on each May 1 thereafter until the maturity date. The notes are collateralized by the 561,333 shares of common stock they purchased with the proceeds of the loans. The notes receivable is shown on the consolidated balance sheets as a reduction in stockholders' equity (see Note 12).
On July 10, 1997, the Company acquired all of the outstanding shares of Predecessor. Equity financing was provided by entities affiliated with DLJ Merchant Banking Partners II, L.P., an affiliate of DLJ. DLJ Capital Funding, Inc., an affiliate of DLJ, received a customary funding fee of approximately $1.5 million related to the issuance of the 1997 Credit Agreement. DLJ received a customary funding fee of approximately $1.9 million related to the issuance of the Senior Subordinated Notes and reimbursement for reasonable out-of-pocket expenses. In August 1998, the Credit Agreement was amended and restated to facilitate the Hittman acquisition (see Note 3). DLJ received a fee of approximately $2.8 million related to acting as a financial advisor to the Company in connection with the acquisition, for its underwriting fee and a bond consent fee. All fees were initially capitalized as deferred financing fees and are being amortized over the life of the underlying debt.
The Company may from time to time enter into other investment banking relationships with DLJ or one of its affiliates pursuant to which DLJ or its affiliates will receive customary fees and will be
F-26 WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIODS FROM JANUARY 1, 1997 TO JULY 10, 1997 AND JULY 11, 1997 TO JANUARY 2, 1998 AND YEARS ENDED JANUARY 1, 1999 AND DECEMBER 31, 1999
17. RELATED PARTY TRANSACTIONS (CONTINUED) entitled to reimbursement of reasonable disbursements and out-of-pocket expenses incurred in connection therewith. The Company expects that any such arrangement will include provisions for the indemnification of DLJ against liability, including liabilities under the federal securities laws.
The Company is a party to an operating lease to a related party under a non-cancelable operating lease which expires in 2006 (see Note 13).
18. SUBSEQUENT EVENTS
In February 2000, the Agreement referred to in Note 8 was amended to change the financial covenants. The Company believes that it will be in compliance with the new covenants in fiscal 2000. The 75 basis point increase in Applicable Margin (as defined in Note 8) was made permanent. The Revolving Facility was set to a maximum of $13.0 million through December 31, 2000. After that time, if the leverage targets are met, the Revolving Facility will increase to $20.0 million.
On March 14, 2000, the Company signed a letter of intent to acquire the stock of a battery manufacturer. Closing of the transaction, along with final determination of a purchase price, will not occur prior to the second half of 2000 and is subject to customary conditions, including due diligence and the execution of a definitive purchase agreement.
* * * * * *
F-27 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Hittman Materials and Medical Components, Inc.
We have audited the accompanying balance sheets of Hittman Materials and Medical Components, Inc. (the "Company") as of August 7, 1998 and December 31, 1997 and the related statements of operations, stockholder's equity and cash flows for the period from January 1, 1998 through August 7, 1998 and year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hittman Materials and Medical Components, Inc. as of August 7, 1998 and December 31,1997, and the results of its operations and its cash flows for the period and year then ended in conformity with generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Baltimore, Maryland September 22, 1998
F-28 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
BALANCE SHEETS
AUGUST 7, 1998 AND DECEMBER 31, 1997
AUGUST 7, DECEMBER 31 1998 1997 ------ASSETS CURRENT ASSETS Cash and cash equivalents...... $ 839,272 $ 800,392 Accounts receivable...... 2,023,195 1,709,351 Inventories...... 1,986,096 2,339,210 Prepaid expenses...... 44,245 27,340 ------Total current assets...... 4,892,808 4,876,293
PROPERTY AND EQUIPMENT--AT COST Furniture, fixtures and equipment...... 2,115,414 1,856,253 Equipment under capital lease...... -- 574,117 ------2,115,414 2,430,370
Less accumulated depreciation and amortization...... 1,558,736 1,748,887 ------556,678 681,483
OTHER ASSETS...... 52,382 52,382 ------$ 5,501,868 $5,610,158 ======LIABILITIES CURRENT LIABILITIES Current maturities of capital lease obligation...... $ -- $ 45,938 Accounts payable...... 402,640 278,746 Accrued compensation and employee benefits...... 536,234 874,572 Accrued expenses...... 94,995 161,429 ------Total current liabilities...... 1,033,869 1,360,685
CAPITAL LEASE OBLIGATION, less current maturities...... -- 306,154
COMMITMENTS...... -- --
STOCKHOLDER'S EQUITY Common stock--par value, $.10 per share; authorized, 1,000 shares; issued and outstanding, 500 shares...... 50 50 Additional paid-in capital...... 5,858,834 299,950 Retained (deficit) earnings...... (1,390,885) 3,643,319 ------4,467,999 3,943,319 ------$ 5,501,868 $5,610,158 ======
The accompanying notes are an integral part of these financial statements.
F-29 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
PERIOD ENDED YEAR ENDED AUGUST 7, DECEMBER 31, 1998 1997 ------NET SALES...... $11,394,951 $18,507,437 COST OF SALES...... 5,072,595 7,769,408 ------Gross profit...... 6,322,356 10,738,029 SELLING AND ADMINISTRATIVE EXPENSES...... 2,202,100 2,829,658 ------Operating profit...... 4,120,256 7,908,371
OTHER INCOME (EXPENSE) Share value plan termination costs...... (4,907,802) -- Gain on termination of capital lease...... 93,940 -- Interest income...... 25,448 27,477 Interest expense...... (20,524) (37,496) Other...... 16,777 29,258 ------(4,792,161) 19,239 ------NET (LOSS) EARNINGS...... $ (671,905) $ 7,927,610 ======
The accompanying notes are an integral part of these financial statements.
F-30 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
ADDITIONAL RETAINED COMMON PAID-IN EARNINGS STOCK CAPITAL (DEFICIT) TOTAL ------BALANCE AT JANUARY 1, 1997...... $50 $ 299,950 $ 2,665,709 $ 2,965,709 Net earnings...... -- -- 7,927,610 7,927,610 Dividends to stockholder...... -- -- (6,950,000) (6,950,000) ------BALANCE AT DECEMBER 31, 1997...... 50 299,950 3,643,319 3,943,319 Net loss...... -- -- (671,905) (671,905) Contributions from stockholder...... -- 5,558,884 -- 5,558,884 Dividends to stockholder...... -- -- (4,362,299) (4,362,299) ------BALANCE AT AUGUST 7, 1998...... $50 $5,858,834 $(1,390,885) $ 4,467,999 ======
The accompanying notes are an integral part of these financial statements.
F-31 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1998 THROUGH AUGUST 7, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
1998 1997 ------Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) earnings...... $ (671,905) $ 7,927,610 Adjustments to reconcile net (loss) earnings to net cash (used in) provided by operating activities Gain on lease termination...... (93,940) -- Depreciation and amortization...... 152,958 323,541 Changes in assets and liabilities Accounts receivable...... (313,844) (177,286) Inventories...... 353,114 (758,891) Prepaid expenses...... (16,905) (13,340) Accounts payable and accrued expenses...... (280,877) (56,390) ------(199,494) (682,366) ------Net cash (used in) provided by operating activities...... (871,399) 7,245,244 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...... (28,154) (133,964) Other...... -- (10,277) ------Net cash used in investing activities...... (28,154) (144,241) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of capital lease obligation...... (27,144) (41,584) Stockholder contributions...... 5,327,876 -- Dividends paid...... (4,362,299) (6,950,000) ------Net cash provided by (used in) financing activities...... 938,433 (6,991,584) ------NET INCREASE IN CASH AND CASH EQUIVALENTS...... 38,880 109,419 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 800,392 690,973 ------CASH AND CASH EQUIVALENTS AT END OF PERIOD/YEAR...... $ 839,272 $ 800,392 ======SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest...... $ 20,524 $ 37,496
NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment contributed by stockholder...... 231,008 -- Capital lease obligation retired...... 324,948 --
The accompanying notes are an integral part of these financial statements.
F-32 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hittman Materials and Medical Components, Inc. (the Company) is principally engaged in the manufacturing of components for medical devices, primarily implantables, such as pacemakers and defibrillators. Components are sold worldwide.
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows.
1. RECEIVABLES
The Company charges off doubtful receivables as bad debts in the year they are deemed to be uncollectible. Management believes that substantially all remaining receivables will be collected in the ordinary course of business and, accordingly, has not provided an allowance for doubtful accounts.
2. INVENTORIES
Inventories are valued at the lower of cost or market. Raw material costs are determined using the first-in, first-out method. Work-in-process and finished goods costs are determined based on accumulated average costs.
3. PROPERTY AND EQUIPMENT
Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives of the assets, principally using an accelerated method.
Equipment under a capitalized lease is depreciated over the lease term, which approximates the service lives of the equipment, using the straight-line method.
4. REVENUE RECOGNITION
Revenues are recognized at the time finished products are shipped.
5. RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred and amounted to approximately $328,587 and $553,277 for the period ended August 7, 1998 and year ended December 31,1997, respectively.
6. INCOME TAXES
The Company has elected to be treated as an S Corporation under the Internal Revenue Code. As a result, income taxes on net earnings are payable personally by the Company's stockholder and the Company is not taxed as a Corporation. Accordingly, no provision has been made for income taxes. Had income taxes been payable by the Company, the income tax benefit would have been approximately $262,000 for the period ended August 7, 1998 and income tax expense of approximately $3,092,000 for the year ended December 31, 1997.
F-33 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 7. STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
9. RECLASSIFICATIONS
Certain reclassifications have been made to 1997 amounts to conform with 1998 presentation.
NOTE B--INVENTORIES
Inventories at August 7, 1998 and December 31, 1997 are comprised as follows:
1998 1997 ------Raw materials...... $1,102,283 $1,475,330 Work-in-process...... 767,248 342,033 Finished goods...... 116,565 521,847 ------$1,986,096 $2,339,210 ======
NOTE C--OTHER ASSETS
In 1993, the Company purchased a split dollar, joint life insurance policy with a last to die provision, on the lives of the Company's sole stockholder and his wife. The Company is the beneficiary to the extent of premiums paid.
NOTE D--CAPITAL LEASE OBLIGATION
The Company leased certain equipment from a related party under an agreement classified as a capital lease, which expired in 2003. The related asset and obligation were recorded using a 10% imputed interest rate. The lease was terminated as of August 7, 1998
F-34 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE D--CAPITAL LEASE OBLIGATION (CONTINUED) The following is a schedule of equipment under capital lease.
AUGUST 7, DECEMBER 31, 1998 1997 ------Equipment under capital lease...... $ -- $574,117 Less accumulated depreciation...... -- 316,501 ------$ -- $257,616 ======
NOTE E--COMMITMENTS
The Company leases its facility from a related party under a non-cancelable operating lease agreement which expires in 2006. The Company is responsible for the payment of property taxes, insurance, maintenance and all other expenses associated with the operation of the facility. Rent expense of $79,277 and $131,520 was charged to operations for the period ended August 7, 1998 and the year ended December 31, 1997, respectively.
The Company also leases equipment under operating lease agreements which expire at various times over the next two to five years. Rent expense of $10,958 and $16,351 was charged to operations for the period ended August 7, 1998 and the year ended December 31, 1997, respectively.
At August 7, 1998, future minimum annual operating lease payments are as follows:
YEAR AMOUNT ------1998...... $ 91,482 1999...... 220,974 2000...... 215,916 2001...... 215,916 2002...... 212,372 2003...... 210,600 Thereafter...... 1,739,405
NOTE F--RETIREMENT PLAN
The Hittman Retirement Plan covers substantially all employees who have reached the age of eighteen and completed six months of service. Eligible employees may execute a written agreement with the Company whereby the employee agrees to accept a salary reduction of not less than 1% nor more than 10% in exchange for the Company's contribution to the plan. The Company must contribute an amount based on the employee's percentage salary reduction. Additional employer contributions are allowed within certain limitations. The Company's contribution was approximately $112,000 in 1998 and $154,000 in 1997.
NOTE G--SHARE VALUE PLAN
In 1989, the Company instituted a share value plan wherein certain employees can receive compensation based on the earnings of the Company and under certain circumstances acquire shares of
F-35 HITTMAN MATERIALS AND MEDICAL COMPONENTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 7, 1998 AND DECEMBER 31, 1997
NOTE G--SHARE VALUE PLAN (CONTINUED) the Company's common stock. Compensation expense of $5,241,428 and $500,000 was charged to operations for the period ended August 7, 1998 and the year ended December 31, 1997, respectively, pursuant to the plan. The plan was terminated as of August 7, 1998.
NOTE H--CONCENTRATIONS
MAJOR CUSTOMERS
During the period ended August 7, 1998, approximately 59% of sales were derived from four major customers and in 1997, approximately 80% of sales were derived from six major customers.
CASH BALANCES
The Company maintains its cash balances in several financial institutions located in Maryland, which at times may exceed federally insured limits. The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash and cash equivalents.
NOTE I--STOCK SALE
Effective with the close of business on August 7, 1998, all of the Company's outstanding stock was sold to Wilson Greatbatch Ltd.
F-36 , 2000
[LOGO]
WILSON GREATBATCH TECHNOLOGIES
SHARES OF COMMON STOCK
PROSPECTUS
JOINT BOOK-RUNNING MANAGERS
DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO.
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BANC OF AMERICA SECURITIES LLC
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF WILSON GREATBATCH TECHNOLOGIES HAVE NOT CHANGED SINCE THE DATE HEREOF.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND REGARDING THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees.
SEC registration fee...... $30,360 NASD filing fee...... 12,000 New York Stock Exchange listing fee...... Printing and engraving...... Legal fees and expenses...... Accounting fees and expenses...... Transfer agent fees...... Miscellaneous expenses...... $ Total...... $
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or the DGCL, provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Section 145 further provides that a corporation similarly may indemnify any such person serving in any such capacity who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or such other court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.
Our restated certificate of incorporation provides that indemnification shall be to the fullest extent permitted by the DGCL for all current or former directors or officers of our company.
As permitted by the DGCL, the certificate of incorporation provides that directors of our company shall have no personal liability to our company or our stockholders for monetary damages for breach of fiduciary duty as a director, except (1) for any breach of the director's duty of loyalty to our company
II -1 or our stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (3) under Section 174 of the DGCL or (4) for any transaction from which a director derived an improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have not sold any securities, registered or otherwise, within the past three years, except as set forth below.
In July 1997, we issued 14,547,104 shares of our common stock for an aggregate purchase price of $43,641,312. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act. We issued 12,577,273 shares to DLJ Merchant Banking and its affiliates, 1,333,333 to former shareholders of Wilson Greatbatch Ltd. who participated in the leveraged buyout and their affiliates, 317,667 shares to members of our management and other key personnel who participated in the leveraged buyout and 318,831 shares to The Northwestern Mutual Life Insurance Company.
In November 1997, we issued 561,332 shares of our common stock, for an aggregate purchase price of $1,684,000, to members of our management and other key personnel who participated in the leveraged buyout. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act.
In March 1998, we issued 42,051 shares of our common stock, for an aggregate purchase price of $126,153, to the Trustees of the Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan as a bonus to the plan members. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rue 701 under the Securities Act.
In April 1998, we issued 200 shares of our common stock, for an aggregate purchase price of $600, to John T. Fordyce upon his exercise of a stock option. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In July 1998, we issued 3,200 shares of our common stock, for an aggregate purchase price of $9,600, to Stuart Scott Ferguson upon his exercise of a stock option. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In August 1998, we issued 800 shares of our common stock, for an aggregate purchase price of $2,400, upon the exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act. We issued 400 shares to Jack Belstadt and 400 shares to Charles Mozeko.
In August 1998, we issued 5,385,024 shares of our common stock for an aggregate purchase price of $16,619,616. We issued 4,748,973 shares to DLJ Merchant Banking and its affiliates. We issued 166,667 shares to East Hill Foundation and 336,051 shares to members of our management and other key personnel who participated in the leveraged buyout and their affiliates. We issued 133,333 shares to former shareholders of Wilson Greatbatch Ltd. who participated in the leveraged buyout and their affiliates. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act.
In August 1998, we issued 3,467 shares of our common stock, for an aggregate purchase price of $10,400, upon the exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act. We issued 400 shares to Robert W. Siegler, 400 shares to Richard M. Garlapow and 2,667 shares to Gary Sfeir.
In August 1998, we issued 114,975 shares of our common stock, for an aggregate purchase price of $344,925, to The Northwestern Mutual Life Insurance Company. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act.
II -2 In November 1998, we issued 5,600 shares of our common stock, for an aggregate purchase price of $16,800, to Robert C. Rusin upon his exercise of a stock option. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In March 1999, we issued 17,935 shares of our common stock, for an aggregate purchase price of $53,805, upon the exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act. We issued 2,413 shares to Gary Whitcher and 15,522 shares to Tim H. Belstadt.
In April 1999, we issued 7,272 shares of our common stock, for an aggregate purchase price of $21,816, upon the exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act. We issued 419 shares to Gayle Fairchild, 419 shares to William Bruns and 6,434 shares to Robert W. Hammell.
In May 1999, we issued 5,593 shares of our common stock, for an aggregate purchase price of $16,782, to Robert C. Jackson upon the exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In August 1999, we issued 232,451 shares of our common stock, for an aggregate purchase price of $2,092,050, to the Trustees of the Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan in anticipation of future employee exercises of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In September 1999, we issued 83,333 shares of our common stock, for an aggregate purchase price of $750,000, to Fred Hittman. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act.
In September 1999, we issued 3,647 shares of our common stock, for an aggregate purchase price of $32,823, to Christine A. Fryz upon her exercise of stock options. The securities were issued in a transaction exempt from Section 5 of the Securities Act pursuant to Rule 701 under the Securities Act.
In December 1999, we issued 27,561 shares of our common stock, for an aggregate purchase price of $293,679, to members of our management and other key personnel who had terminated their employment. The securities were issued in a private placement in reliance on Section 4(2) of the Securities Act.
No underwriters were involved in connection with any transaction set forth above. As noted above, the issuances of the securities described above were deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering. In all of these transactions, the recipients of securities represented their intention to acquire the securities for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and appropriate legends were affixed to the securities issued.
II -3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation
3.2** Amended and Restated Bylaws
5.1 Opinion of Weil, Gotshal & Manges LLP
10.1** 1997 Stock Option Plan (including form of "standard" option agreement and form of "special" option agreement)
10.2** 1998 Stock Option Plan (including form of "standard" option agreement, form of "special" option agreement and form of "non-standard" option agreement)
10.3** Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan
10.4** Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan
10.5** Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch Ltd. and Edward F. Voboril
10.6** Securities Purchase Agreement, dated as of July 10, 1997, among WGL Acquisition Corp., Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.7** Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.8** Note Registration Rights Agreement, dated as of July 10, 1997, among Wilson Greatbatch Ltd., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., DLJ LBO Plans Management Corporation, The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.9** Amended and Restated Credit Agreement, dated as of August 7, 1998, among Wilson Greatbatch Ltd., DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.10** Waiver and Amendment No. 1 to Credit Agreement, dated as of November 15, 1999, among Wilson Greatbatch Ltd., the Consenting Obligors party thereto, DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.11** Amendment No. 2 to Credit Agreement, dated as of February 10, 2000, among Wilson Greatbatch Ltd., the Consenting Obligors party thereto, DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.12** Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies Inc. party thereto
II -4 EXHIBIT NUMBER DESCRIPTION ------10.13** Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto
10.14** Management Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto
10.15** Subordinated Note Holders Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.16+ Supply Agreement (SVO Batteries), dated as of July 31, 1991, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.17**+ Amendment No. 1 to the Supply Agreement (SVO Batteries), dated as of June 3, 1996, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.18**+ Amendment No. 2 to the Supply Agreement (SVO Batteries), dated as of March 24, 1997, between Wilson Greatbatch Ltd. And Medtronic Inc.
10.19**+ Amendment No. 3 to the Supply Agreement (SVO Batteries), dated as of July 22, 1999, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.20**+ Supply Agreement, dated as of February 1, 1999, among Wilson Greatbatch Ltd. and Guidant/CRM
10.21+ Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company
10.22**+ License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd. and Evans Capacitor Company
10.23+ Supplier Partnering Agreement, dated as of June 1, 2000, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company
10.24 License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.25 Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.26 Stockholders Agreement, dated as of August 23, 1999, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and Fred Hittman
21.1** List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Grant Thornton LLP
II -5 EXHIBIT NUMBER DESCRIPTION ------23.3 Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5.1)
24.1** Power of Attorney
27.1** Financial Data Schedule
* To be filed by amendment.
** Previously filed.
+ Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
(B) FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER DESCRIPTION ------S-1 Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(b) To provide to the underwriter(s) at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter(s) to permit prompt delivery to each purchaser.
(c) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II -6 SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Clarence, New York, on July 3, 2000.
WILSON GREATBATCH TECHNOLOGIES, INC.
By: /s/ ARTHUR J. LALONDE ------Arthur J. Lalonde Vice President, Finance and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
NAME TITLE DATE ------/s/ EDWARD F. VOBORIL * President, Chief Executive Officer and ------Chairman of the Board (principal executive July 3, 2000 Edward F. Voboril officer)
/s/ ARTHUR J. LALONDE Vice President, Finance and Treasurer ------(principal financial and accounting July 3, 2000 Arthur J. Lalonde officer)
/s/ DAVID L. JAFFE * Director ------July 3, 2000 David L. Jaffe
/s/ ROBERT E. RICH * Director ------July 3, 2000 Robert E. Rich
/s/ DOUGLAS E. ROGERS * Director ------July 3, 2000 Douglas E. Rogers
/s/ HENRY WENDT * Director ------July 3, 2000 Henry Wendt
/s/ DAVID M. WITTELS * Director ------July 3, 2000 David M. Wittels
*By: /s/ ARTHUR J. LALONDE ------Arthur J. Lalonde Attorney-in-Fact
II -7 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
COL. C ADDITIONS ------COL. B CHARGED BALANCE AT CHARGED TO OTHER COL. D COL. E COL. A BEGINNING TO COSTS ACCOUNTS- DEDUCTIONS- BALANCE AT DESCRIPTION OF PERIOD & EXPENSES DESCRIBE DESCRIBE(1) END OF PERIOD ------January 1, 1997 to July 10, 1997: Allowance for doubtful accounts...... $ 118 $ 63 $ -- $ (53) $ 128 Valuation for LIFO inventory...... 1,173 -- -- (90) 1,083
July 11, 1997 to January 2, 1998: Allowance for doubtful accounts...... 128 4 -- (9) 123 Valuation for LIFO inventory...... 1,083 -- -- (1,083)(2) --
Fiscal 1998: Allowance for doubtful accounts...... 123 111 -- (37) 197
Fiscal 1999: Allowance for doubtful accounts...... 197 179 -- (157) 219
(1) Accounts written off, net of collections on accounts receivable.
(2) Represents the LIFO inventory valuation applicable to Predecessor adjusted in accordance with the purchase method of accounting.
S-1 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------1.1* Form of Underwriting Agreement
3.1** Amended and Restated Certificate of Incorporation
3.2** Amended and Restated Bylaws
5.1 Opinion of Weil, Gotshal & Manges LLP
10.1** 1997 Stock Option Plan (including form of "standard" option agreement and form of "special" option agreement)
10.2** 1998 Stock Option Plan (including form of "standard" option agreement, form of "special" option agreement and form of "non-standard" option agreement)
10.3** Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan
10.4** Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan
10.5** Employment Agreement, dated as of July 9, 1997, between Wilson Greatbatch Ltd. and Edward F. Voboril
10.6** Securities Purchase Agreement, dated as of July 10, 1997, among WGL Acquisition Corp., Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.7** Registration and Anti-Dilution Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.8** Note Registration Rights Agreement, dated as of July 10, 1997, among Wilson Greatbatch Ltd., DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., DLJ First ESC L.L.C., DLJ LBO Plans Management Corporation, The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.9** Amended and Restated Credit Agreement, dated as of August 7, 1998, among Wilson Greatbatch Ltd., DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.10** Waiver and Amendment No. 1 to Credit Agreement, dated as of November 15, 1999, among Wilson Greatbatch Ltd., the Consenting Obligors party thereto, DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.11** Amendment No. 2 to Credit Agreement, dated as of February 10, 2000, among Wilson Greatbatch Ltd., the Consenting Obligors party thereto, DLJ Capital Funding, Inc., as Syndication Agent, Heller Financial, Inc., as Documentation Agent, Fleet National Bank, as Administrative Agent, and various financial institutions party thereto as Lenders
10.12** Stockholders Agreement, dated as of July 16, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto
EXHIBIT NUMBER DESCRIPTION ------10.13** Amendment No. 1 to Stockholders Agreement, dated as of October 31, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto
10.14** Management Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, and the other holders of common stock of Wilson Greatbatch Technologies, Inc. party thereto
10.15** Subordinated Note Holders Stockholders Agreement, dated as of July 10, 1997, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., U.K. Investment Plan 1997 Partners, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc., The Northwestern Mutual Life Insurance Company and Donaldson, Lufkin & Jenrette Securities Corporation
10.16+ Supply Agreement (SVO Batteries), dated as of July 31, 1991, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.17**+ Amendment No. 1 to the Supply Agreement (SVO Batteries), dated as of June 3, 1996, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.18**+ Amendment No. 2 to the Supply Agreement (SVO Batteries), dated as of March 24, 1997, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.19**+ Amendment No. 3 to the Supply Agreement (SVO Batteries), dated as of July 22, 1999, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.20**+ Supply Agreement, dated as of February 1, 1999, among Wilson Greatbatch Ltd. and Guidant/CRM
10.21+ Agreement, dated as of April 16, 1997, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company
10.22**+ License Agreement, dated August 8, 1996, between Wilson Greatbatch Ltd. and Evans Capacitor Company
10.23+ Supplier Partnering Agreement, dated as of June 1, 2000, between Wilson Greatbatch Ltd. and Pacesetter, Inc., a St. Jude Medical Company
10.24 License Agreement, dated March 16, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.25 Amendment No. 1 to License Agreement, dated July 20, 1976, between Wilson Greatbatch Ltd. and Medtronic Inc.
10.26 Stockholders Agreement, dated as of August 23, 1999, among Wilson Greatbatch Technologies, Inc., DLJ Merchant Banking Partners II, L.P., DLJMB Funding II, Inc., DLJ Merchant Banking Partners II-A, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ First ESC L.P., DLJ Offshore Partners II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners and Fred Hittman
EXHIBIT NUMBER DESCRIPTION ------21.1** List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Grant Thornton LLP
23.3 Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5.1)
24.1** Power of Attorney
27.1** Financial Data Schedule
* To be filed by amendment.
** Previously filed.
+ Portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. EXHIBIT 5.1
[LETTERHEAD OF WEIL, GOTSHAL & MANGES LLP]
July 3, 2000
Wilson Greatbatch Technologies, Inc. 10,000 Wehrle Drive Clarence, New York 14031
Ladies and Gentlemen:
We have acted as counsel to Wilson Greatbatch Technologies, Inc., a Delaware corporation (the "Company"), in connection with the preparation and filing by the Company of a Registration Statement on Form S-1 (Registration No. 333-37554) (the "Registration Statement") under the Securities Act of 1933, as amended, relating to the proposed offering of shares (the "Shares") of the common stock, par value $.001 per share, of the Company. The Shares will be issued and sold pursuant to an Underwriting Agreement (the "Underwriting Agreement") to be entered into among Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc., DLJdirect Inc. and the Company. Capitalized terms defined in the Underwriting Agreement and used (but not otherwise defined) herein are used herein as so defined.
In so acting, we have examined originals or copies (certified or otherwise identified to our satisfaction) of the form of the Underwriting Agreement filed as an exhibit to the Registration Statement, the form of resolutions (the "Resolutions") proposed to be adopted by the pricing committee (the "Pricing Committee") of the Board of Directors of the Company authorizing the issuance and sale of the Shares pursuant to the Underwriting Agreement and such corporate records, agreements, documents and other instruments, and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives, as we have deemed relevant and necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. As to all questions of fact material to these opinions that have not been independently established, we have relied upon certificates or comparable documents of officers and representatives of the Company. We have also assumed for purposes hereof that (i) the Underwriting Agreement will be executed and delivered in substantially the form thereof filed as an exhibit to the Registration Statement and (ii) the Pricing Committee will adopt the Resolutions authorizing the issuance and sale of the Shares pursuant to the Underwriting Agreement in substantially the form reviewed by us.
Based on the foregoing, and subject to the qualifications stated herein, we are of the opinion that:
1. The Company is a corporation validly existing and in good standing under the laws of the State of Delaware.
2. The Shares, when issued and sold in the manner described in the Registration Statement and in accordance with (i) the Resolutions as adopted by the Pricing Committee and (ii) the terms of the Underwriting Agreement, will be duly authorized, validly issued, fully paid and non-assessable.
We hereby consent to the use of this letter as an exhibit to the Registration Statement and to any and all references to our firm in the Prospectus which is a part of the Registration Statement.
Very truly yours,
WEIL, GOTSHAL & MANGES LLP Exhibit 10.16*
The confidential portions of this exhibit, which have been removed and replaced with an asterisk, have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406.
CONFIDENTIAL CONFIDENTIAL
SUPPLY AGREEMENT SVO BATTERIES
This Supply Agreement (this "Agreement") is made as of the 31st day of July, 1991 by and between Wilson Greatbatch Ltd., a corporation duly organized under the laws of the State of New York, U.S.A. and having its principal place of business at 10,000 Wehrle Drive, Clarence, New York 14031 (hereinafter "WGL"), and Medtronic, Inc., a corporation duly organized under the laws of the State of Minnesota, U.S.A. and having its principal place of business at 7000 Central Avenue, N.E., Minneapolis, Minnesota 55432 (hereinafter "Medtronic").
RECITALS
A. WGL has the capability and desire to manufacture for and supply to Medtronic SVO Batteries, as defined below, for use in Products, as defined below.
B. Medtronic desires to purchase a supply of SVO Batteries from WGL for use in Products all in accordance with the terms of this Agreement.
C. In addition, WGL desires to grant to Medtronic and Medtronic desires to obtain from WGL on the date first set forth above a worldwide, nonexclusive. royalty free license to utilize defined Subject Patents and Know-How of WGL relating to SVO Batteries, all in accordance with the terms of the License Agreement, as defined below.
D. The parties acknowledge that Medtronic's purpose in entering into this Agreement is to obtain a reliable source of SVO Batteries of high quality and that WGL agrees to provide such a source subject to all of the terms and conditions set forth in this Agreement. The parties further acknowledge that Medtronic intends over time to develop both its internal capabilities to manufacture SVO Batteries to meet its anticipated requirements for such SVO Batteries, and in addition is establishing by this Agreement a second source supply arrangement with WGL for supply of SVO Batteries to substantially assist Medtronic in meeting its requirements for SVO Batteries.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1 DEFINITIONS
1.1 Affiliate. "Affiliate" of any entity is any other entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the
-1- first entity. Control shall mean owning more than 50 percent of the total voting power of the entity.
1.2 Confidential Information. "Confidential Information" shall mean know-how, trade secrets, and unpublished information disclosed by one of the parties (the "disclosing party") to the other party (the "receiving party") or generated under this Agreement, excluding information which:
(a) was already in the possession of receiving party prior to its receipt from the disclosing party, provided that the receiving party shall provide the disclosing party with reasonable documentary proof thereof;
(b) is or becomes part of the public domain by reason of acts not attributable to the receiving party;
(c) is or becomes available to receiving party from a source other than the disclosing party which source, to the receiving party's knowledge, has rightfully obtained such information and has no obligation of non-disclosure or confidentiality to the disclosing party with respect thereto; or
(d) is made available by the disclosing party to a third party unaffiliated with the disclosing party on an unrestricted basis.
All Confidential Information disclosed by one party to the other under this Agreement, insofar as practicable, shall ultimately be in writing and bear a legend "Company Proprietary", "Company Confidential" or words of similar import. Accordingly, all Confidential Information disclosed in any manner other than writing shall, insofar as practicable, be preceded by an oral statement indicating that the information is company proprietary or confidential, and shall be followed by transmittal of a reasonably detailed written summary of the information provided to the receiving party with identification as Confidential Information designated as above within thirty (30) days.
1.3 Intellectual Property. "Intellectual Property" shall mean all patents, inventions, discoveries, know-how, trade secrets, data, information, technology, processes, formulas, drawings, designs, computer programs, licenses, and all amendments, modifications, and improvements to any of the foregoing.
1.4 Contract Year. "Contract Year" shall mean each respective annual period during the term of this Agreement which commences on August 1 and ends on the next following July 31.
1.5 First Contract Period, Second Contract Period, and Third Contract Period. "First Contract Period", "Second Contract Period", and "Third Contract Period" shall mean, respectively, the
-2- periods of (i) August 1, 1991 to July 31, 1995, (ii) August 1, 1995 to July 31, 1998, and (iii) August 1, 1998 to July 31, 2001.
1.6 License Agreement. "License Agreement" shall mean the License Agreement to be executed by WGL and Medtronic on even date herewith, in the form of the attached Exhibit A hereto.
1.7 Product. "Product" shall mean implantable medical products used in the treatment of cardiac tachycardia or fibrillation now and hereafter manufactured by or for Medtronic.
1.8 Quota. "Quota" shall mean the respective period minimum quantities of SVO Batteries which Medtronic shall be expected to purchase from WGL in accordance with the terms and conditions of Article 5 of this Agreement.
1.9 SVO Batteries. "SVO Batteries" shall mean any battery for use in a Product which battery uses silver vanadium oxide as a cathode material.
1.10 Security Agreement. "Security Agreement" shall mean the Security Agreement to be executed by WGL on even date herewith, in the form of the attached Exhibit B hereto, which shall secure WGL's performance of its obligations to Medtronic under this Agreement.
1.11 New Battery. "New Battery" shall mean any SVO Battery that requires full WGL qualification as a new cell and that has been in implantable grade production for less than 180 days. WGL Models 8830 and 8615 are not, for purposes of this Agreement, considered "New Batteries."
ARTICLE 2 GENERAL OBLIGATIONS OF Medtronic
2.1 Quality Control. Medtronic agrees to follow reasonable quality control standards with respect to the storage, preservation, and use of SVO Batteries purchased under this Agreement and consistent in all material respects with the reasonable recommendations of WGL. Medtronic shall maintain production, inventory and sales records with respect to Product incorporating SVO Batteries purchased from WGL under this Agreement, in sufficient detail to enable Medtronic to conduct an effective recall of such Product should such a recall be deemed appropriate by Medtronic.
2.2 Regulatory Approval Efforts. During the term of this Agreement Medtronic shall have responsibility for obtaining at its expense, in its name and at its discretion any necessary device regulatory approvals from the U.S. Food and Drug Administration (i.e., PMA's or 510(k)'s as the case may be), and applicable regulatory agencies of such other countries in which Product incorporating the SVO Batteries will be sold. WGL shall supply
-3- Medtronic with all documents, instruments, information, reports and advice and general assistance as is necessary to complete, and as is reasonably requested by Medtronic in connection with, such regulatory approval efforts.
ARTICLE 3 GENERAL OBLIGATIONS OF WGL
3.1 WGL's Manufacture and Supply of SVO Batteries. Except as otherwise provided in Section 4.2 hereof, WGL shall use all reasonable commercial efforts during the term of this Agreement to supply to Medtronic SVO Batteries in the quantities ordered by Medtronic, in accordance with the specifications now in effect and hereafter agreed to by the parties and with Medtronic's schedules for delivery thereof. WGL acknowledges that such quantities ordered by Medtronic may amount to * of Medtronic's requirements for SVO Batteries for use in Products during the term of this Agreement.
3.2 SVO Battery Specifications. The current specifications for the SVO Batteries to be purchased under this Agreement are attached hereto as Exhibit C, except for the specifications for the SVO Battery to be used in Medtronic PCD Model 7218 which specifications are now being finalized by mutual agreement (the SVO Batteries specifications attached are presently intended for use in Medtronic's PCD Models 7216, 7217 and 7219). It is the expectation of both parties that WGL will maintain commercially competitive capabilities in the research, design, development and manufacture of SVO Batteries. Subject to Section 6.3 hereof, WGL agrees that it will promptly undertake to implement any changes to existing designs of SVO Batteries and any new designs of SVO Batteries proposed for purchase by Medtronic under this Agreement to the extent reasonably requested by Medtronic from time to time, provided that such efforts requested are reasonably within the then-existing or imminently planned-for capabilities of WGL and such efforts are reasonably deemed by Medtronic as likely to enhance Medtronic's competitive position in and/or profit from the development and sale of Products. Such implementations shall be conditional upon the successful completion of such evaluation and qualification procedures as WGL shall reasonably require to ensure the safety, reliability, quality, and manufacturability of such proposed changes and new designs. Medtronic may not require delivery of SVO Batteries incorporating such changes until sixty (60) days after completion of such qualification procedures and such delivery shall be subject to the provisions of Section 4.7.
3.3 Compliance With U.S. Laws and Regulations; Compliance With Specifications. WGL shall be responsible for compliance with present and future applicable statutes, laws, ordinances and regulations of United States and foreign national, federal, state and local governments relating to the manufacture and, except as otherwise provided in Section 2.2 hereof, the sale of SVO Batteries
-4- to Medtronic under this Agreement. WGL will provide such Medtronic personnel as Medtronic reasonably deems appropriate with reasonable access from time to time to WGL's facilities and records for the purpose of confirming WGL's compliance with requirements noted in this Section, and for the further purpose of confirming, if reasonably deemed necessary by Medtronic, WGL's compliance with applicable specifications for SVO Batteries.
3.4 Failure to Meet Delivery Schedules. If WGL is unable for any reason, other than Force Majeure, to meet any scheduled deliveries specified by Medtronic for SVO Batteries, as provided for in Article 4 hereof, and such inability is material to Medtronic in amount and significance, WGL shall on written request of Medtronic then allocate, with respect to the Contract Period within which the delay in delivery originated, the following respective percentages of WGL's SVO Battery manufacturing capacity to fulfill Medtronic's orders for SVO Batteries: * percent for the First Contract Period, * percent for the Second Contract Period, and * percent for the Third Contract Period. Such allocation of plant capacity by WGL shall continue until the delivery schedule for SVO Batteries to Medtronic is being met on a current basis. Furthermore, in the event of any aforementioned inability of WGL to meet scheduled deliveries to Medtronic, WGL will engage in communications with and will fully cooperate with Medtronic as requested by Medtronic, and provide appropriate, mutually agreed upon Medtronic personnel with reasonable access to WGL's SVO Battery manufacturing facility as requested by Medtronic, to determine the causes of such inability and possible measures to correct such inability and prevent its recurrence in the future.
ARTICLE 4 ORDERS FOR SVO BATTERIES
4.1 Orders for SVO Batteries. Medtronic will submit orders for SVO Batteries to WGL in writing, whether by mail, telecopy, telex or otherwise, and such orders will set forth at a minimum: (a) an identification of SVO Batteries ordered, (b) quantities ordered, (c) delivery dates, and (d) shipping instructions.
4.2 Order Limitations. In the event orders placed by Medtronic for delivery within any month exceed the monthly average of Product units ordered by Medtronic under the most recent prior period of * consecutive months of Medtronic firm purchase orders by more than * or by more than * SVO Battery units, whichever is greater, then WGL shall not be obligated to supply any such excess above such * or * unit overage as applicable, however, WGL shall use all reasonable commercial efforts to supply amounts requested for delivery which are in excess of such overage, it being understood that in the supply of any such excess beyond the permitted overage WGL may take into account delivery commitments to other customers. Notwithstanding the foregoing, WGL shall not be required to supply within any
-5- forecast period a number of SVO Battery units which is in excess of * times the aggregate number of SVO Battery units forecast for delivery by Medtronic during such forecast period under Section 4.5 hereof. It is understood by the parties, however, that in the event WGL refuses to supply any SVO Batteries to Medtronic because of the foregoing cap on WGL's periodic supply requirements and such refusal makes it impossible for Medtronic to meet a purchase quota under Article 5 hereof, then the relevant Medtronic purchase quota requirement shall be deemed reduced by the number of SVO Battery units which WGL so refuses to deliver.
4.3 Modification of Orders. No aforementioned order shall be modified or canceled except upon the mutual agreement of the parties. Mutually agreed change orders shall be subject to all provisions of this Agreement, whether or not the change order so states. Notwithstanding the foregoing, Medtronic may in its sole discretion by written notice to WGL cancel orders for and deliveries of any SVO Batteries which are not delivered within sixty (60) days of the delivery date requested by Medtronic and in the event of such cancellation by Medtronic, Medtronic may then make such appropriate adjustments to any outstanding orders and forecasts as it deems advisable in light of any shortfalls in supply which relate to such cancellation. The foregoing rights of cancellation and adjustment by Medtronic, together with the rights of Medtronic set forth in Section 3.4 hereof and in Section 4.6 hereof, the right of reduction in Quotas set forth in Section 5.4 hereof, and the right of termination of this Agreement by Medtronic for material breach of this Agreement set forth in Section 12.2 hereof, shall be the exclusive remedies to which Medtronic may be entitled as a result of delayed deliveries by WGL.
4.4 Delivery Terms. All deliveries of SVO Batteries shall be F.O.B. WGL's manufacturing facility at 10,000 Wehrle Drive, Clarence, New York. Accordingly, all risk of damage to or loss or delay of SVO Batteries purchased under this Agreement shall pass to Medtronic upon their delivery at the F.O.B. point to a common carrier specified by Medtronic or, in the event that no carrier shall have been specified by Medtronic on or before the date fifteen (15) days prior to the requested shipment date, a common carrier reasonably selected by WGL.
4.5 Medtronic's Forecasts. Upon execution of this Agreement by the parties, Medtronic agrees to provide WGL with a twelve (12) month forecast indicating Medtronic's forecast purchases of SVO Batteries from WGL during the period August 1, 1991 through July 31, 1992 (and which shall take into account orders for SVO Batteries placed by Medtronic prior to execution of this Agreement). Such forecast shall be updated monthly (prior to the final day of each full month during the term of this Agreement) by Medtronic in writing to WGL on a rolling basis such that the forecast shall at all times cover the prospective twelve (12) month period. Such rolling forecasts by Medtronic shall be used
-6- for purposes of facilitating each party's planning and in order to meet the lead times required by certain of WGL's suppliers. Such forecasts are not legally binding in any manner and may be revised from time to time by Medtronic as it deems appropriate, provided, however, that SVO Batteries scheduled for delivery within the first four months of each aforesaid twelve month forecast period shall represent and constitute a firm order by Medtronic.
4.6 Penalties for Specified Delivery Delays. The provisions of this Section 4.6 shall become effective 9 months after the date of both parties signing this Supply Agreement. If, prior to July 31, 1995 or, while WGL is the sole supplier of a particular SVO Battery model as to which delays are occurring, WGL is unable for any reason (other than force majeure) to meet any scheduled deliveries specified by Medtronic for SVO Batteries, as provided for in Article 4 hereof, and such delay is material to Medtronic in amount and significance (including but not necessarily limited to any such delay which would cause Medtronic to reduce its planned production of Products, which shall be deemed material to Medtronic) then, notwithstanding any contrary provisions of the Security Agreement or this Agreement or of law, with the exception of Section 3.4 hereof, the rights of cancellation and adjustment set forth in Section 4.3 hereof, the right of reduction in Quotas set forth in Section 5.4 hereof, and the right of termination of this Agreement by Medtronic for material breach of this Agreement set forth in Section 11.2 hereof: at Medtronic's request and until such time as WGL can promptly deliver from its current production quantities of delayed SVO Batteries to fully support Medtronic manufacturing requirements, WGL shall use SVO Batteries comprising Inventory under the Security Agreement (to the extent such SVO Batteries are available in the appropriate models) to offset delayed SVO Batteries. Subject to the foregoing conditions of this Section 4.6, for each SVO Battery unit which is not delivered, whether out of said Inventory or from current production, within sixty (60) days of the delivery date requested by Medtronic pursuant to the order and delivery terms of this Agreement, WGL shall immediately make a repayment to Medtronic of a portion of the * sum referenced in Section 6.7 hereof, to the extent such sum has not already been repaid in whole by WGL under this Section 4.6 or Section 6.7 of this Agreement or under the Security Agreement, which repayment shall be determined by multiplying * times the number of such delayed units. The total of any aforementioned repayments by WGL under this Section 4.6 together with any repayments under Section 6.7 and under the Security Agreement shall in no event exceed *. Any such repayments made to Medtronic shall not relieve WGL of its responsibility to deliver the delayed units as soon as possible in the event the orders for such delayed units have not been cancelled by Medtronic. The foregoing provisions shall not reduce or otherwise affect the adjustments to Medtronic's permitted outstanding account payable to WGL for SVO Batteries to the extent provided for in Section 6.2
-7- hereof. The foregoing rights in this Section 4.6, together with the rights of Medtronic set forth in Section 3.4 hereof and in Section 4.3 hereof, the right of reduction in Quotas set forth in Section 5.4 hereof, and the right of termination of this Agreement by Medtronic for material breach of this Agreement set forth in Section 11.2 hereof, shall be the exclusive remedies to which Medtronic may be entitled as a result of delayed deliveries by WGL.
4.7 Scheduled Deliveries for New Battery. It is expressly understood that the first six (6) months of scheduled delivery for any New Battery as defined herein will be strictly on a best efforts basis by WGL and will not be subject to any provision regarding failure to deliver including Section 3.4, 4.3, 4.6, 5.4 and 11.2.
ARTICLE 5 PURCHASE QUOTAS
5.1 Contract Year Quota. Medtronic agrees to purchase and take delivery from WGL of a quota of SVO batteries during each Contract Year in an amount equal to the lesser of (a) * SVO Batteries, or (b) * of Medtronic's requirements for SVO Batteries for that Contract Year.
5.2 Contract Period Quota. During the First Contract Period, Second Contract Period and Third Contract Period, respectively, Medtronic agrees to purchase and take delivery from WGL of the following quotas of SVO Batteries:
(a) A quota for the First Contract Period in an amount equal to * of Medtronic's requirements for SVO Batteries during such Contract Period;
(b) A quota for the Second Contract Period in an amount equal to * of Medtronic's requirements for SVO Batteries during such Contract Period; and
(c) A quota for the Third Contract Period in an amount equal to * of Medtronic's requirements for SVO Batteries during such Contract Period.
5.3 Purchase Carry Forwards. For purposes of determining whether Medtronic has met any Contract Period quota, Medtronic may carry forward from any one Contract Period to any future Contract Periods such number of purchased SVO Battery units as is in excess of the Contract Period quota for the period from which such carry forward is being made. Notwithstanding the foregoing, the maximum number of purchased SVO Battery units which Medtronic may carry forward from any one Contract Period to any future Contract Period or Periods shall be * units.
-8- 5.4 Reductions in Quota. Notwithstanding Medtronic's obligations pursuant to Sections 5.1 and 5.2 hereof, Medtronic's Quota for any quota period shall be reduced (a) in the case of subpart (i) below by an amount equal to * times the amount of SVO Batteries, the order and delivery of which has been canceled by Medtronic pursuant to Section 4.3 hereof, (b) in the case of subpart (ii) below, by an amount equal to * times the amount of SVO Batteries affected by such recall or withdrawal, and (c) in the case of subpart (iii) below, by an amount equal to * times the amount of SVO Batteries of the revised design noted below which Medtronic itself manufactures and incorporates into Product (or has a third party manufacture, as permitted under this Agreement), following WGL's failure to supply such revised design battery.
(i) If WGL fails for any reason to deliver ordered SVO Batteries within sixty (60) days of the date scheduled for delivery thereof, including but not limited to a failure to deliver SVO Batteries which conform to the then current specifications for SVO Batteries;
(ii) If any Product incorporating SVO Batteries provided under this Agreement is recalled from the market or withdrawn from sale for reasons of product safety or quality due to battery performance as determined by any applicable governmental authority or by Medtronic in its reasonable judgment after consultation with WGL; or
(iii) If WGL is unable or for any other reason fails to implement any revised SVO Battery design requested by Medtronic under the provisions of Section 3.2 hereof.
Subject to Section 4.6 regarding penalties for specified delivery delays, the foregoing adjustments to Quotas shall not be deemed to waive or otherwise adversely affect any other remedy to which Medtronic may be entitled as a result of the occurrence of events giving rise to any such reduction in Quotas which remedy is specifically set forth in Section 3.4, 4.3, 4.6 or 11.2 hereof. The rights of Medtronic set forth in this Section 5.4, together with the rights of Medtronic set forth in Section 3.4 hereof, Section 4.3 hereof and in Section 4.6 hereof, and the right of termination of this Agreement by Medtronic for material breach of this Agreement set forth in Section 11.2 hereof, shall be the exclusive remedies to which Medtronic may be entitled as a result of delayed deliveries by WGL.
5.5 Reports and Records. Within ninety (90) days after the end of each Contract Year, Medtronic shall provide WGL with a written report indicating the number of Product units manufactured by or for Medtronic during such period which incorporate an SVO Battery. Upon reasonable notice and during regular business hours, but no more frequently than once for any Contract Year and only with respect to a Contract Year which has been completed in the prior
-9- three year period, Medtronic shall at WGL's written request make available appropriate records substantiating the number of Product units manufactured by Medtronic in such prior Contract Years which incorporate an SVO Battery for audit at WGL's expense by an independent certified accounting representative to verify the accuracy of the reports provided to WGL. Such representative shall execute a suitable confidentiality agreement reasonably acceptable to Medtronic prior to conducting such audit. Such representative may disclose to WGL only its conclusions regarding the accuracy and completeness of said reports, and shall not disclose Confidential Information of Medtronic to WGL without the prior written consent of Medtronic.
5.6 Cure of Quota Shortfalls. In the event WGL determines that Medtronic has failed to meet a Contract Year or Contract Period Quota as provided for in this Article 5 it shall promptly notify Medtronic in writing of such failure and the amount by which the applicable Quota has not been met. Notwithstanding any contrary provisions of this Agreement, Medtronic shall have a period of ninety (90) days after receipt of any such written notice from WGL and verification of the alleged deficiency to cure any failure to purchase Quotas by placing firm orders for appropriate additional purchases of SVO Batteries from WGL. Any such purchases made to cure a failure to meet Quota shall not be counted as purchases for Quota purposes for any Contract Year or Contract Period other than the ones as to which such cure has been effected.
5.7 Determining Quota Percentage. For purposes of determining whether Medtronic's Quota for any period has been met (subject to such adjustments as are provided for in this Agreement), the numerator of the fraction which determines the percentage of Quota shall be the number of SVO Battery units delivered by WGL to Medtronic during such period (less the number of such delivered units, if any, which were rightfully not accepted by Medtronic) and the denominator of such fraction shall be the total number of SVO Battery units incorporated in Product units of Medtronic which enter into commercial production (and are intended for commercial sale, as opposed to use for development, demonstration, testing or other purposes) during such period.
ARTICLE 6 PRICES AND PAYMENTS
6.1 SVO Batteries Prices. Except as otherwise provided in Section 6.10 hereof, the price to be paid by Medtronic for SVO Batteries purchased from WGL during the term of this Agreement shall be * U.S. per SVO Battery. All prices are F.O.B. WGL's manufacturing facility in Clarence, New York. Except as otherwise provided in Section 6.5, the foregoing * U.S. per unit price shall apply to all SVO Batteries purchased from WGL whether such units are prototypes, pilot production or commercial run units.
-10 - 6.2 Unit Payment Terms. Payments made by Medtronic for SVO Batteries purchased hereunder shall be due and payable thirty (30) days after shipping date F.O.B. from Clarence, New York. Notwithstanding the foregoing sentence, once the * sum referenced in Section 6.7 hereof has been delivered to WGL from escrow as provided for in said Section 6.7, Medtronic shall not be required during the term of this Agreement to pay down its account payable to WGL for SVO Batteries purchased hereunder to any amount below the greater of (a) * and (b) * plus the dollar amount derived by multiplying the then current per unit purchase price for SVO Batteries under this Agreement times the number of SVO Battery units which results from subtracting (i) the actual average number of SVO Battery units in the Minimum Inventory (whether or not the required level of Minimum Inventory, as defined in the Security Agreement, has been met) during the most recently completed semi-annual period in the latest Contract Year from (ii) the threshold level of * units; provided, however, that this sentence shall no longer be applicable from and after the date WGL shall have repaid in full the * sum referenced in Section 6.7 hereof. Any interest earned on the advance payment while in escrow at Chemical Bank, as provided for in Section 6.7, shall be credited to Medtronic's account, with such credit to be applied by WGL at the instruction and discretion of Medtronic against any purchases of SVO Batteries by Medtronic made after the escrowed funds have been disbursed to WGL. In the event the aforesaid * and interest thereon have been disbursed to Medtronic in accordance with the terms of the escrow agreement referenced in Section 6.7, then Medtronic shall have no further right to the aforementioned purchase price credit relating to interest earned on the escrowed *.
6.3 Design Fees. In the event that during the term of this Agreement Medtronic requests that WGL supply to it a new model or models of SVO Battery under this Agreement, then Medtronic will pay to WGL a reasonable design fee for WGL's efforts in designing such new model or models of SVO Battery. Such design fee shall be mutually agreed to by the parties in good faith and in no event will such fee be greater than an amount equal in all material respects to that being paid at or near the time of such design changes by other purchasers for a comparable degree of design changes to SVO Batteries purchased from WGL. Any significant design changes for SVO Batteries in production shall cost a minimum of *.
6.4 Taxes. Medtronic shall be responsible for and shall pay, or reimburse WGL for, all taxes, duties, import fees, assessments and other governmental charges (except net income taxes) including those that relate to the import of SVO Batteries into countries to which Medtronic has requested delivery of such SVO Batteries. Notwithstanding the foregoing, WGL shall be responsible for and pay any import taxes or fees for any importation of SVO Batteries into
-11 - the United States should WGL elect to manufacture the SVO Batteries outside of the United States.
6.5 Adjustments Relating to Outstanding Order. Notwithstanding any contrary prior agreements or understandings of the parties with respect to SVO Batteries presently on order by Medtronic from WGL as of the execution date of this Agreement (i.e., the WGL #8830 battery for use in Medtronic's #7217 PCD), such on order units will remain priced at * U.S. per SVO Battery provided, however, that the last * of such SVO Batteries (currently scheduled for delivery after January 1, 1992) will be priced at * U.S. per SVO Battery. Moreover, all of such SVO Batteries on order by Medtronic from WGL as of the execution date of this Agreement shall be considered as purchases from WGL during the term of this Agreement for the purpose of determining if Medtronic has met its quota responsibilities under Article 5 of this Agreement.
6.6 Most Favored Terms. WGL acknowledges and agrees that the price charged to Medtronic for SVO Batteries shall at no time during the term of this Agreement be higher than or otherwise less favorable than the price in effect from time to time during the term of this Agreement for substantially comparable SVO Batteries purchased by any other party from WGL in equal or lesser quantities than are to be purchased by Medtronic hereunder, provided, however, that the foregoing clause shall not apply to SVO Batteries that are not intended for, and in fact do not rightfully enter into, commercial sale to end user customers, such as those used for development, demonstration, or testing purposes. Accordingly, within thirty (30) days of the completion of each Contract Year, WGL shall provide to Medtronic a written certification by an executive officer of WGL that WGL has fully complied with the terms of this Section 6.6. Upon reasonable notice and during regular business hours, but no more frequently than once for any Contract Year and only with respect to a Contract Year which has been completed in the prior three year period, WGL shall at Medtronic's written request make available appropriate records substantiating the accuracy of WGL's certifications referenced above for audit at Medtronic's expense by an independent certified accounting representative to verify the accuracy of such certifications. Such representative shall execute a suitable confidentiality agreement reasonably acceptable to WGL prior to conducting such audit. Such representative may disclose to Medtronic only its conclusions regarding the accuracy and completeness of said certifications, and shall not disclose Confidential Information of WGL to Medtronic without the prior written consent of WGL. If appropriate based on information provided by WGL or based on the result of an audit provided for above, the price charged to Medtronic for SVO Batteries hereunder shall be downwardly adjusted to the lowest level that such comparable SVO Batteries are being sold to third parties. Such downward price adjustment shall be made
-12 - retroactively effective to the date upon which the aforesaid lower pricing first commenced, with an appropriate adjusting payment to be made to Medtronic for prior overcharges (which adjusting payment Medtronic may elect to take in the form of a lump sum cash payment from WGL or in the form of an offsetting credit against future purchases of SVO Batteries from WGL).
6.7 Advance Payment. Promptly following execution of this Agreement by the parties hereto, Medtronic shall deliver a check in the amount of * to Chemical Bank, Buffalo, New York as escrow agent ("Escrow Agent"). The Escrow Agent shall cause the escrowed funds to be deposited in an interest-bearing account and to be delivered to WGL, together with all interest earned thereon, upon receipt of a statement from WGL's independent auditors certifying that WGL's Inventory (as defined in the Security Agreement) is then comprised of not less that * SVO Battery units. Such statement shall be provided to Medtronic for review and comments not less than fifteen (15) days before it is provided by WGL to the Escrow Agent. If the Escrow Agent shall not have received such certificate within 365 days of the date this Agreement is executed by both parties, the Escrow Agent shall deliver the escrowed funds to Medtronic, together with all interest earned thereon. The parties agree to execute such form of escrow agreement with the Escrow Agent as sets forth the foregoing terms and such other terms as are reasonably customary in such agreements. Such sum of * (if received by WGL) shall constitute an advance payment of purchase price for the last * of purchases of SVO Batteries by Medtronic from WGL under this Agreement. WGL shall have the right to repay at any time the * advanced by Medtronic under this Section 6.7, less the amount of any repayments by WGL under Section 4.6 hereof, in which event the Security Agreement shall automatically terminate (as provided for therein) and the credits against the payment of purchase price for the last * of purchases of SVO Batteries provided for in this Section 6.7 shall no longer apply. If for any reason it occurs that at the time of any termination of this Agreement Medtronic has not recouped the entire aforesaid * amount, less the amount of any repayments already made by WGL under Section 4.6 hereof, in the form of purchase price credits for SVO Batteries purchased from WGL under this Agreement, then any unrecouped portion of such * shall constitute a repayment obligation of WGL which shall be immediately due and payable to Medtronic in full upon demand by Medtronic of payment thereof. In the event that during either or both of the final Contract Year of the First Contract Period or the final Contract Year of the Second Contract Period the actual number of SVO Batteries delivered to Medtronic in such respective Contract Year totals less than * units, and the forecast for the succeeding year is less than * units, then WGL shall immediately make a repayment to Medtronic of a percentage of the aforesaid
-13 - * which percentage amount shall equal the percentage by which said actual number of delivered units is short of said * unit level. Any repayment amount due to Medtronic with respect to the Second Contract Period under the foregoing provision may be reduced by the amount of any repayment made under such provision with respect to the First Contract Period.
6.8 Medtronic Manufacturing Payments. If during the Third Contract Period Medtronic manufactures more than * but * or less of its requirements for SVO Batteries during such period, Medtronic will pay WGL a per unit fee of * per SVO Battery manufactured by Medtronic within such * through * category. In addition, if during the Third Contract Period Medtronic manufactures more than * but * or less of its requirements for SVO Batteries during such period, Medtronic will pay WGL a per unit fee of * per SVO Battery manufactured by Medtronic within such * through * category. Any such payments due by Medtronic shall be made annually within ninety (90) days of the completion of each Contract Year within such Third Contract Period. The annual payment due by Medtronic, if any, for the first Contract Year within such Third Contract Period shall be calculated based on the number of SVO Batteries manufactured by Medtronic during such first Contract Year. The annual payment due by Medtronic, if any, for the second Contract Year within such Third Contract Period shall be calculated based on the aggregate number of SVO Batteries manufactured by Medtronic during both the first and second Contract Years within such Third Contract Period, and any such payment shall take into account and reflect appropriate adjustments for any overpayments or underpayments by Medtronic with respect to the aforementioned first Contract Year. The annual payment due by Medtronic, if any, for the third Contract Year within such Third Contract Period shall be calculated based on the aggregate number of SVO Batteries manufactured by Medtronic during all of the first, second and third Contract Years within such Third Contract Period, and any such payment shall take into account and reflect appropriate adjustments for any overpayments or underpayments by Medtronic with respect to the aforementioned first or second Contract Years. In the event it is determined, after completion of the Third Contract Period, that Medtronic has made annual payments under this Section 6.8 which in total exceed the aggregate amount to which WGL is entitled under this Section 6.8 due to Medtronic manufacturing during the Third Contract Period, then WGL shall promptly repay (but in no event more than 15 days after written notice from Medtronic identifying the amount of excess payment by Medtronic) to Medtronic in cash the amount of such excess payment by Medtronic. In the event that the Quota for the Third Contract Period is reduced in accordance with the provisions of Section 5.4 hereof, then the aggregate number of units by which such Quota has been so reduced shall be considered as SVO Battery units purchased by Medtronic from WGL during the Third contract Period for purposes of determining any manufacturing payments due from Medtronic to WGL under the terms of this Section 6.8. References in this Section
-14 - 6.8 to SVO Batteries manufactured by Medtronic shall be deemed to include any SVO Batteries manufactured for Medtronic by a person or entity other than WGL. For purposes of determining the applicable Medtronic manufacturing payment due from Medtronic under this Section, if any, there shall be considered only those SVO Battery units manufactured by Medtronic to be incorporated in Products intended for commercial sale, as opposed to SVO Battery units manufactured by Medtronic and to be used alone or with Products for development, demonstration, testing or other "not for sale" purposes. Any SVO Batteries manufactured by or for Medtronic (other than by WGL) and in Medtronic's finished goods inventory at the end of the Third Contract Period shall for purposes of this Section 6.8 be deemed to be intended for commercial sale and a manufacturing payment shall be due thereon.
6.9 Meet or Release Provision. On and after August 1, 1995, the following provisions shall become effective:
Notwithstanding any contrary terms or provisions of this Supply Agreement, Medtronic shall have the right to solicit written bids from time to time from any qualified manufacturers (other than an affiliate or a spinoff of Medtronic) of comparable implantable grade SVO Batteries other than WGL, as defined herein. Medtronic may submit any such bids it receives to WGL and upon such submission WGL shall have a period of sixty (60) days in which to advise Medtronic in writing that WGL is willing and agrees to provide to Medtronic the SVO Batteries covered by such bid on the pricing terms set forth in such bid. In the event that WGL elects to provide said SVO Batteries to Medtronic on said terms, then this Supply Agreement shall then be deemed appropriately amended to incorporate such revised pricing terms for the SVO Batteries covered by such bid (and any SVO Batteries purchased by Medtronic relating to such bid shall be deemed to be SVO Batteries purchased from WGL for all purposes under this Supply Agreement, including but not limited to the purposes of Article 5 and Section 6.8 hereof). In the event that WGL does not make a timely election to provide said SVO Batteries to Medtronic on said pricing terms, then Medtronic may in its discretion accept such bid and purchase said SVO Batteries from the bidding manufacturer on the pricing terms set forth in such bid or such other pricing terms as may be more favorable to Medtronic than the terms set forth in the initial bid (and any SVO Batteries so purchased by and delivered to Medtronic under said bid shall be deemed to be SVO Batteries manufactured by Medtronic with the exception that solely for purposes of calculating Quotas under Article 5 hereof the SVO Battery units delivered to Medtronic by said third party bidding manufacturer shall be treated as though they were purchased by Medtronic from WGL.
Such purchases shall not relieve Medtronic of the obligation under Section 5.1 to purchase the lesser of * of its requirements or
-15 - SVO Batteries per year for the term of this Supply Agreement, from WGL.
For the purposes of this Supply Agreement, a qualified manufacturer is defined to be a legal entity that has delivered production quantities of SVO Batteries to a Medtronic competitor for use in FDA (or the regulatory equivalent in any other country) approved "Products" as defined herein, and who is not involved in patent or know-how litigation with WGL regarding the Subject Patents and Know-How, as defined in the License Agreement. Furthermore, if Medtronic accepts a bid from a qualified manufacturer who contracts to deliver SVO Batteries that WGL otherwise would have delivered and who fails to deliver within the contracted time period those quantities contracted for, then Medtronic shall fully comply with all Article 5 quota terms of this Supply Agreement by, if necessary to meet the applicable quota reordering from WGL any SVO Batteries not delivered by said qualified manufacturer.
6.10 Permitted Price Adjustments.
(a) The price of * per SVO Battery provided for in Section 6.1 is subject to upward modification, from time to time, by WGL during the period which commences on August 1, 1995 and ends on July 31, 2001 if WGL incurs a "Significant Cost Increase." The amount of any such permitted price increase due to a Significant Cost Increase shall in no event exceed the lesser of (1) the actual per unit amount of the increase over WGL's fully allocated product cost of SVO Batteries as of the date of this Agreement, or (2) the actual per unit increase attributable to cost items set forth in (i) through (v) below. For purposes of this Section 6.10, the term "Significant Cost Increase", shall mean an increase by * or more in WGL's fully allocated product cost of manufacturing SVO Batteries over WGL's fully allocated product cost of SVO Batteries as of the date of this Agreement. Fully allocated product cost as referenced in this Section shall be reasonably determined in accordance with generally accepted accounting principles and shall allocate all general, administrative and other indirect expenses among each of WGL's products proportionately based upon their respective manufactured product unit volumes. Furthermore, the future fully allocated product cost of manufacturing SVO Batteries shall be calculated in a manner consistent with that used for the calculation of the fully allocated product cost of manufacturing SVO Batteries as of the date of this Agreement. WGL shall have its independent auditors calculate WGL's fully allocated per unit product cost of manufacturing SVO Batteries as of the date of this Agreement and document such determination and the methodology used in such calculation (with such efforts to be completed not later than 30 days following the date this Agreement is signed by both of the parties hereto).
-16 - (i) Any requirement under applicable environmental or labor laws, rules or regulations including but not limited to OSHA, relating to or affecting work conditions for WGL employees involved in the manufacture, testing and handling of SVO Batteries, including, but not limited to, the handling, storage and disposal of raw materials used by WGL or any waste resulting therefrom.
(ii) Any requirement under applicable environmental laws, rules or regulations pertaining to the transportation, handling, storage and disposal of material actually used by WGL in manufacturing SVO Batteries, including disposal of any waste resulting therefrom.
(iii) Any price increases imposed by WGL vendors of raw materials or parts for the manufacture of SVO Batteries.
(iv) Any state or Federal law, rule, regulation or mandated program, including, but not limited to, any of the foregoing which imposes on WGL a new tax, fee, surcharge or employee benefit, welfare or insurance program (excluding increases in any existing taxes, fees, surcharges or employee benefit, welfare or insurance programs).
(v) Any incremental increases in the costs of production labor, equipment and materials which are directly and exclusively related to changes expressly required by Medtronic in the materials, structure or manufacture of SVO Batteries to be provided by WGL to Medtronic (excluding any labor, equipment, materials and other WGL costs which are covered by the design fees provided for in Section 6.3 hereof).
(b) If WGL is entitled and determines to impose a price increase under this Section 6.10, WGL shall give not less than five months' written notice thereof in order that the forecasts provided for in Section 4.5 to be made by Medtronic can take into account any such price increase. WGL may not impose a price increase during the permitted period hereunder more frequently than once every 12 months. Notwithstanding the foregoing provisions of this Agreement, WGL may, at any time before or after August 1, 1995, give immediate effect to price increases based on costs identified in subpart (v) above if and when such costs constitute a Significant Cost Increase. WGL shall deliver to Medtronic together with the notice provided for herein a written report which describes in reasonable detail the basis for WGL's determination that a price increase is permitted under this Section 6. 10. WGL
-17 - shall at Medtronic's written request make available appropriate records substantiating the basis for its determination that a significant Cost Increase has occurred (including the fully allocated per Unit product cost of manufacturing SVO Batteries as of the date of this Agreement and methodology used in such calculation determined as required above) for audit at Medtronic's expense by an independent certified public accounting representative to verify the accuracy of the reports provided to Medtronic. Such representative shall execute a suitable confidentiality agreement reasonably satisfactory to WGL prior to conducting such audit. Such representative may disclose to Medtronic only its conclusions regarding the accuracy and completeness of such reports, and shall not disclose Confidential Information of WGL to Medtronic without the prior written consent of WGL. Any such request for an audit must be made by Medtronic within six months of any announced price increase hereunder.
(c) The provisions of this Subsection (c) shall not apply price increases based on costs identified in subpart (v) paragraph (a) above. Subject to the preceding sentence notwithstanding any contrary provisions of this Agreement including but not limited to Medtronic's obligations pursuant to Sections 5.1 and 5.2 hereof, during the period in which price increases are permitted under this Agreement (i) in the event the price of SVO Batteries is increased beyond * then each of the purchase Quotas set forth in Section 5.2 shall thereupon be automatically reduced by * percent *, and (ii) in the event the price of SVO Batteries is increased beyond * then each of the purchase Quotas set forth in Section 5.2 shall thereupon be automatically reduced by * percent *, and (iii) in the event the price of SVO Batteries is increased beyond * then each of the purchase Quotas set forth in Section 5.1 and 5.2 shall thereupon be automatically reduced to *, and Medtronic shall not be required to purchase * SVC Batteries from WGL. Any aforementioned reduction in Quota will not affect the validity or term of the License Agreement.
ARTICLE 7 INSPECTION, WARRANTY AND SERVICE
7.1 Inspection of SVO Batteries. Medtronic shall conduct any incoming inspection tests not later than forty five (45) days from the date of receipt of SVO Batteries at the shipping address to which Medtronic has requested delivery of such SVO Batteries. SVO Batteries not rejected by Medtronic by written notice to WGL within such period shall be deemed accepted, with the exception of SVO Batteries with latent defects that are not readily observable by Medtronic. In the event of any shortage, damage or discrepancy in or to a shipment of SVO Batteries or in the event any SVO Batteries fail to comply with the then current specifications for SVO Batteries, Medtronic shall promptly report the same to WGL and furnish such written evidence or other documentation as WGL
-18 - reasonably may deem appropriate. If evidence indicates that such shortage, damage or discrepancy or non-conformity with specifications existed at the time of delivery of SVO Batteries at the F.O.B. point, Medtronic may return the SVO Batteries to WGL at WGL's expense, and at Medtronic's request WGL shall promptly deliver substitute SVO Batteries to Medtronic in accordance with the delivery procedures set forth herein.
7.2 Warranty. WGL warrants to Medtronic that SVO Batteries sold by WGL to Medtronic under this Agreement shall be in conformance with applicable specifications and shall be free from defects in material and workmanship at the time of delivery of said svo Batteries at the F.O.B. point.
7.3 Limited Warranty. THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY WGL, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
ARTICLE 8 CONFIDENTIALITY
8.1 Non-Disclosure. Each party agrees not to use any Confidential Information of the other party during the term of this Agreement and for a period of five (5) years thereafter for any purpose other than as permitted or required for performance by the party receiving such Confidential Information of its rights or duties hereunder or under the License Agreement. Each party further agrees not to disclose or provide any of such Confidential Information of the other party to any third party, other than as permitted or required for performance by the parties receiving such Confidential Information of its rights or duties hereunder or under the License Agreement, and to take appropriate measures to prevent any such disclosure by its present and future employees, officers, agents, subsidiaries, or consultants during the term of this Agreement and for a period of five (5) years thereafter. Without limitation of the foregoing, the recipient of Confidential Information of the other party shall protect such Confidential Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of the Confidential Information, as the recipient uses to protect its own proprietary information of a like nature.
ARTICLE 9 INTELLECTUAL PROPERTY
9.1 Ownership. WGL represents and warrants to Medtronic the following: Neither WGL, its business nor any of WGL's SVO Batteries nor the execution and performance of this Agreement and the License Agreement and the transactions contemplated herein and
-19 - therein, infringes, misuses, misappropriates or conflicts with the patent and other intellectual property rights or contract rights, of others. WGL has full corporate right and authority to enter into this Agreement, the License Agreement and the Security Agreement. WGL agrees to defend and hold Medtronic harmless against monetary liability to any third party arising out of any claim by such third party of patent or other intellectual property rights infringement or contract rights violation based upon Medtronic's sale of Products incorporating SVO Batteries supplied by WGL, including reasonable legal fees and expenses, but excluding incidental, special or consequential damages and, without limitation, loss of sales, profits or revenues. The provisions of this Section shall survive the termination and expiration of the Supply Agreement.
ARTICLE 10 LIMITATION OF WGL LIABILITY
10.1 Remedies for Breach of Warranty. In the event that any SVO Battery manufactured or sold by WGL to Medtronic under this Agreement fails to comply with the limited warranty provided for in Article 7 and Medtronic delivers notice of such noncompliance to WGL, within 12 :months of the delivery of such SVO Battery to Medtronic (or within 12 months of Medtronic's discovery of any latent defects in an SVO Battery that are not readily observable by Medtronic), WGL will, upon substantiation that the SVO Battery has been stored, preserved and used in accordance with Section 2.1, correct such failure by suitable repair or replacement at its own expense. WGL agrees that it will promptly inform Medtronic in writing of any actual or potential problems of which WGL becomes aware relating to the performance of any SVO Battery design manufactured for Medtronic relative to the specifications for such design.
10.2 Limitation of Liability. The repair or replacement of any defective SVO Battery or any SVO Battery which does not conform with applicable specifications as provided, for herein, in the manner provided above, shall (except with respect to the remedies specifically provided for in this Agreement regarding delivery delays and such other remedies as are specifically provided for in this Agreement, including the remedy provided to Medtronic in Section 10.3 hereof) constitute the full extent of WGL's liability to Medtronic with respect to SVO Batteries sold hereunder. In no event shall WGL be liable under this Supply Agreement or the License Agreement for incidental, special or consequential damages, including, but not limited to, loss of sales, profits or revenues or costs of any partial or total recall of Product in which SVO Batteries may have been incorporated, and in no event shall WGL be liable in an amount in excess of its product liability insurance as provided for under Section 10.3. The provisions of Sections 10.1 and 10.2 shall survive the expiration or termination of this Agreement.
-20 - 10.3 products Liability Insurance. WGL shall maintain product liability insurance in such amounts as ordinary good business practice for its type of business would make advisable and shall provide Medtronic with evidence of this coverage. Such product liability insurance shall name Medtronic, Inc. as an additional named insured thereunder, it being understood that Medtronic shall have the right to seek recovery under said, product liability insurance for any claims for damages, liabilities, costs (including but not limited to attorneys' fees), settlements or judgments which may be made against Medtronic on account of personal injury or property damage to any person caused by or arising from defects in materials, design, workmanship, or manufacture of SVO Batteries supplied by WGL to Medtronic under this Agreement, and Medtronic agrees to seek recovery for any such claims directly from WGL's product liability insurance carrier. Medtronic acknowledges and agrees that the amount of product liability insurance maintained by WGL on the date of this Agreement, which is set forth in the certificate of insurance to be delivered to Medtronic simultaneously herewith, satisfies the criteria set forth in this Section 10.3.
ARTICLE 11 TERM AND TERMINATION
11.1 Term. This Agreement shall become binding and enforceable on the date upon which it is fully executed by the parties hereto, however, the terms and provisions hereof shall become operative and shall take effect as of July 31, 1991, and this Agreement shall continue in force through July 31, 2001 at which time it shall expire.
11.2 Termination. Notwithstanding the provisions of Section 11.1 above, this Agreement may be terminated in accordance with the following provisions:
(a) A party may terminate this Agreement by giving notice in writing to the other party in the event the other party is in breach of any material representation, warranty or covenant of this Agreement and shall have failed to cure such breach within ninety (90) days of receipt of written notice thereof from the first party;
(b) A party may terminate this Agreement at any time by giving notice in writing to the other party, which notice shall be effective upon dispatch, should the other party file a petition of any type as to its bankruptcy, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership; or
(c) A party may terminate this Agreement by giving notice in writing to the other party should an event of Force Majeure continue for more than one hundred eighty (180) consecutive days as provided in section 12.1 below.
-21 - 11.3 Rights-and Obligations on Termination. Termination of this Agreement shall not release either party from the obligation to make payment of all amounts previously due and payable, or which become due and payable due to termination of this Agreement.
ARTICLE 12 FORCE MAJEURE
12.1 Force Majeure. Force Majeure shall mean any event or condition, not existing as of the date of signature of this Agreement, not reasonably foreseeable as of such date and not reasonably within the control of either party, which prevents in whole or in material part the performance by one of the parties of its obligations hereunder.
12.2 Notice. Upon giving notice to the other party, a party affected by an event of Force Majeure shall be released without any liability on its part from the performance of its obligations under this Agreement, except for the obligation to pay any amounts due and owing hereunder, but only to the extent and only for the period that its performance of such obligations is prevented by the event of Force Majeure.
12.3 Suspension of Performance. During the period that the performance by one of the parties of its obligations under this Agreement has been suspended by reason of an event of Force Majeure, the other party may likewise suspend the performance of all or part of its obligations hereunder to the extent that such suspension is commercially reasonable.
ARTICLE 13 MISCELLANEOUS
13.1 Relationship. This Agreement does not make either party the employee, agent or legal, representative of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party. In fulfilling its obligations pursuant to this Agreement, each party shall be acting as an independent contractor.
13.2 Assignment. This Supply Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective permitted successors and assigns. It may not be voluntarily assigned in whole or in part by either party without the prior written consent of the other; provided, however, that a successor in interest by merger, by operation of law, purchase or otherwise of the entire business (with respect to Medtronic, the business being that relating to Products; with respect to WGL, the business being that relating to SVO Batteries) of either party shall acquire all interest of such party hereunder, and further provided that a party may assign this Supply Agreement to an
-22 - Affiliate of such party (the party to this Supply Agreement who makes any such assignment to an Affiliate shall, notwithstanding such assignment, remain fully responsible for assuring, and for any failure to assure, prompt performance by such Affiliate of all of such assigning party's obligations under this Supply Agreement). Any prohibited assignment shall be null and void. Nothing contained in this assignment provision shall be construed as limiting or restricting in any way WGL's ability to restructure as a publicly owned entity.
13.3 Entire Agreement. This Agreement and the License Agreement and Security Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and Supersedes all previous proposals or agreements, oral or written, and all negotiations, conversations or discussions heretofore had between the parties related to the subject matter of this Agreement, the License Agreement and the Security Agreement. Notwithstanding the foregoing, those provisions of the existing development contract between WGL and Medtronic dated July 1990 for WGL battery Model 8952 (for use in Medtronic PCD Model 7219), those of the development contract between WGL and Medtronic for WGL battery #8830 (for use in Medtronic PCD Model 7217) and those provisions of any other development agreements which have provisions which were effective prior to the date of this Agreement, shall remain in effect to the extent such provisions are not contrary to the terms and provisions of this Agreement.
13.4 Governing Law. This Agreement shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, U.S.A.
13.5 Survival. All of the representations, warranties, and indemnifications made in this Agreement, and all terms and provisions hereof intended to be observed and performed by the parties after the termination hereof, shall survive such termination and continue thereafter in full force and effect, subject to applicable statute of limitations.
13.6 Waiver, Discharge, etc. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties to this Agreement by their duly authorized representatives. The failure of either party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of either party after any such failure to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.
13.7 Execution in Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and
-23 - the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party.
13.8 Titles and Headings; Construction. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted.
13.9 Benefit. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
13.10 Notices. All notices or other communications to a party required or permitted hereunder shall be in writing and shall be delivered personally or by telecopy (receipt confirmed) to such party (or, in the case of an entity, to an executive officer of such party) or shall be given by certified mail, postage prepaid with return receipt requested, addressed as follows: if to Manufacture, to:
Wilson Greatbatch Ltd. 10,000 Wehrle Drive Clarence, New York 14031 Attention: Edward F. Voboril, President and Chief Executive Officer and if to Medtronic, to:
Medtronic, Inc. Corporate Center 7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
Attention: Michael D. Ellwein, Vice President Corporate Development and Assistant General counsel
WGL or Medtronic may change their respective above-specified recipient and/or mailing address by notice to the other party given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail).
13.11 Severability. If any provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions shall nonetheless be enforceable according to their
-24 - terms. Further, if any provision is held to be overbroad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended.
13.12 Execution of Further Documents. Each party agrees to execute and deliver without further consideration any further applications, Licenses, assignments or other documents, and to perform such other lawful acts as the other party may reasonably require to fully secure and/or evidence the rights or interests herein.
13.13 No Modification by Form Documents. In no event will the use by Medtronic of any form of purchase order, or the use by WGL of any form of acknowledgement or shipping document, be effective to vary, alter or modify the terms and provisions of this Agreement; nor will such use have the effect of substituting the provisions set forth on such form for the provisions contained in this Agreement.
13.14 Contemporaneous Agreements. Contemporaneous with the execution of this Agreement, each of the parties hereto shall execute and deliver to the other the License Agreement in form attached hereto as Exhibit A, and WGL shall execute and deliver to Medtronic the Security Agreement in form attached hereto as Exhibit B.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed below in the manner appropriate to each.
WILSON GREATBATCH LTD.
By /s/ Edward F. Voboril ------
Its President / CEO ------
MEDTRONIC, INC.
By /s/ B. Kristine Johnson ------Its Vice President ------
-25 - Exhibit 10.21
The confidential portions of this exhibit, which have been removed and replaced with an asterisk, have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment under Rule 406.
CONFIDENTIAL
AGREEMENT BETWEEN WILSON GREATBATCH LTD. AND PACESETTER, INC.
THIS AGREEMENT (the "Agreement") is between Wilson Greatbatch Ltd. located in Clarence, New York ("WGL") and Pacesetter, Inc., a St. Jude Medical Company, located in Sylmar, California ("Pacesetter").
RECITALS: WGL and a predecessor of the Company are parties to a Purchase Contract, entered into by WGL and the Company's predecessor- in-interest, Siemens Pacesetter, Inc. on January 1, 1995 (the "1995 Purchase Contract"). WGL and the Company desire to amend the 1995 Purchase Contract and to expand the business relationship between them as set forth in this Agreement. The effective date of this Agreement shall be April 16, 1997 ("Effective Date").
AGREEMENT: In consideration of the foregoing Recitals, which are hereby made part of this Agreement, and for valuable consideration, receipt of which is hereby acknowledged, and in consideration of the mutual covenants and agreements herein contained, WGL and the Company agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following specially capitalized terms shall have the meanings set forth below:
1.1 Affiliates. "Affiliates" shall mean any other entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the first entity, including both other entities which are Affiliates at the date of execution (signature of both parties hereto) of this Agreement and other entities which become Affiliates after the date of execution of this Agreement. Control of an entity shall mean ownership of 50 percent or more of the total voting securities or other voting interests of the entity.
1.2 Batteries. "Battery" and "Batteries" shall mean power sources for use in the Company's implantable medical devices including, but not limited to, cardiac rhythm management devices.
1.3 Company. "Company" as used herein shall include both Pacesetter, Inc. and all of its Affiliates.
1.4 Consignment Batteries. "Consignment Batteries" shall mean Batteries consigned by WGL to the Company at a Company facility pursuant to Section 2.5 of this Agreement.
1.5 Contract Year. "Contract Year" shall mean each calendar year.
1.6 Micro-Electronic Components. "Micro-Electronic Components" shall mean hybrids, electronic circuitry, and components therefor which are used in Company's implantable cardiac rhythm management devices.
1.7 Non-Hybrid Products. "Non-Hybrid Products" shall mean all components and assemblies, other than Micro-Electric Components, high- voltage capacitors and Batteries, which are used in the Company's implantable cardiac rhythm devices, and which are within one of the following categories: (a) enclosures, (b) pre-molded header components, (c) connectors, (d) coated and uncoated precious metals, (e) coils, (f) feedthroughs, (g) precision machined parts and (h) mechanical spacers and other mechanical components used in such implantable devices. The initial set of such components and assemblies is listed on Attachment A hereto, and may include such other components or assemblies as the parties shall agree upon in writing by amending Attachment A.
1.8 Relevant Cost Factors. "Relevant Cost Factors" shall mean the following:
(a) Any price increases imposed by WGL vendors of raw materials or purchased components for the manufacture of products covered by this Agreement ("Raw Material Costs").
(b) Any state or Federal law, rule, regulation or mandated program which imposes on WGL a new tax, fee or surcharge or additional costs and which either (i) relates to the handling, storage, transportation or disposal of hazardous or other materials that are regulated under environmental laws or (ii) is a tax, fee or surcharge imposed on WGL based on the nature of the business operated by WGL (collectively, "Regulatory Costs").
(c) Any incremental increases in the costs of labor, equipment and materials which are directly and exclusively related to changes expressly required by the Company in the materials, structure or manufacture of products to be provided by WGL to the Company pursuant to this Agreement (excluding any labor, equipment, materials and other WGL costs which are covered by any design fees payable by the Company to WGL)("New Design Costs").
Page 2 2. POWER SOURCE SUPPLY ARRANGEMENTS
2.1 Supply of Requirements. The Company hereby agrees to purchase from WGL, and WGL hereby agrees to sell to the Company, * of the Company's requirements for Batteries for use in the Company's implantable medical devices during the term of this Agreement, upon and subject to the terms and conditions set forth in this Agreement. This Agreement shall apply to all of the facilities of the Company and of its Affiliates on a worldwide basis. In addition, regardless of location, the Company will not replace any existing WGL battery models with Batteries supplied by others.
2.2 Price. Pricing for Batteries during the remainder of 1997 shall be as set forth in the 1995 Purchase Contract. Subject to Section 2.8, the prices for Batteries to be purchased by the Company commencing as of January 1, 1998 shall be determined as provided for in this Section 2.2, and shall apply regardless of the location of the Company's facility to which Batteries will be delivered.
(a) The prices for lithium iodine batteries having a thickness of 5 mm or greater shall be * per cell, beginning on January 1, 1998 through the termination of this Agreement on December 31, 2001.
(b) The prices for (i) lithium iodine Batteries having a thickness of less than 5 mm and (ii) lithium iodine Battery models the volume of which is less than * cells per Contract Year shall be the price set forth in Section 2.2(a) plus a premium of *.
(c) The price for titanium CFx Batteries are * per cell, beginning January 1, 1998 through the termination of this Agreement on December 31, 2001.
(d) There shall be an extra charge to the Company for unique pin modifications in the Batteries including, but not limited to, a modification such as the gold plating requirement in Pacesetter Model 9438.
(e) If the Company requires power sources which are other than WGL's current standard production cells or which use alternative battery chemistry, the pricing shown on Attachment B will apply.
Page 3 (f) If the Company proceeds with the development of a "hi-value pacemaker," WGL will propose separate pricing and specifications for the Battery and other components for any such new pacemaker product of the Company. In that regard, the Company agrees to involve WGL during the planning and design of such pacemaker in order to ensure that the product will be competitive in cost (including Battery) for the intended market. WGL agrees that if the Company determines that, for competitive reasons, the new product must include a power source that WGL does not then have rights to, WGL will use its reasonable best efforts to obtain a license or other rights to manufacture and sell such Battery. The parties will agree in writing on the pricing and other terms and conditions of sale for WGL's Battery and any other components for any such hi-value pacemaker product.
2.3 Forecasts. The parties agree as follows:
(a) The Company will provide WGL with a forecast setting forth three (3) months firm orders for Batteries and an additional nine (9) months forecast stating anticipated Battery needs. This forecast will provide WGL with a total of twelve (12) months projected requirements for planning purposes at all times. Such forecast, including a new firm order for Batteries, will be provided each succeeding month.
(b) WGL shall not be required to manufacture more than * of the Company's twelve (12) month forecast quantity of Batteries in any one three (3) month period, except upon not less than a six (6) month prior written notice. The sole exception to this provision shall be if WGL has fallen behind on past deliveries due to its own fault, in which case WGL shall be required to manufacture and deliver each month up to * more than the average monthly quantities which were scheduled for the preceding three-month period until WGL is back on schedule with its deliveries.
2.4 Payment Terms. Payment terms for Batteries are as follows: (a) for Consignment Batteries purchased by the Company, by the thirtieth (30th) day after the day on which Consignment Batteries shall have been withdrawn by the Company or (b) for all other Batteries purchased by the Company, net 30 days from the date of the invoice, F.O.B. Clarence, NY or point of shipment, whichever is applicable. Payment terms for tooling and engineering charges are net 30 days from the date of the invoice. If payments are delinquent, a late charge fee of * per month will be imposed. The calculation will be based on thirty (30) day months the percentage will be pro rated based upon the exact number of days late. Payment terms for these charges will be net 30 days.
Page 4 2.5 Consignment.
(a) As promptly after the execution and delivery of this Agreement as the operations of WGL will permit, but by no means later than January 31, 1998, and the parties shall mutually agree, WGL will consign and ship to itself, in care of the Company, Consignment Batteries the number of which shall be approximately equal to * (calculated by dollar cost) of the Batteries purchased by the Company from WGL in 1997. Thereafter, during the term of this Agreement, WGL will ship additional quantities of Consignment Batteries to the Company so that the number of Consignment Batteries at all times shall be approximately equal to * of the Company's total purchases of Batteries for the preceding Contract Year (calculated by dollar cost). WGL shall use its reasonable best efforts to maintain the model mix of Consignment Batteries as close as is reasonably possible to Company's most recent twelve (12) month forecast of projected Battery requirements. The Consignment Batteries shall be delivered to the Company location at which the Company will use the Batteries, based upon information supplied by the Company to WGL. However, WGL shall have the option not to make any such shipment unless the Company shall have paid all sums owing with respect to all previous quantities of Batteries purchased by the Company.
(b) WGL shall use Federal Express or UPS or other recognized courier services to ship Consignment Batteries, as directed by the Company, and shall charge the Company's account with such courier service. Consignment Batteries shall be received by the Company and stored by the Company as WGL's property. All charges and expenses for receiving, handling, and storing such material shall be paid by the Company. The Consignment Batteries in all cases shall be carefully segregated from other goods either of the same or different character belonging either to the Company or to any third person, shall be marked as WGL's property, and shall be stored in an area in the Company's facilities separate from and not mingled with other goods of the Company or of any third person.
(c) The Company shall inspect all Batteries (including the Consignment Batteries) and notify WGL within one month if any of the Batteries fail to meet the Company's specifications and quality standards for such Batteries.
(d) The Company shall comply with all laws which might in any way affect WGL's ownership of the Consignment Batteries from time to time stored in the Company's facility(s) and shall indemnify and hold harmless WGL from and against all loss, damage, and expense arising out of any levy, attachment, lien or process involving the Consignment Batteries. The Company shall be responsible for, and shall indemnify WGL against, any loss or shrinkage in the quantity of the Consignment Batteries while so stored, whether such loss or shrinkage is caused by theft or pilferage or by fire, flood, tornado or other similar
Page 5 catastrophe. The Company shall purchase and maintain insurance covering all such losses and naming WGL as additional insured.
(e) The Company shall keep at all times a complete list or inventory of the Consignment Batteries so stored, copies of which list shall be furnished to WGL upon request. Upon not less than three (3) business days prior notice, WGL's representatives shall have reasonable access to the Consignment Batteries at the Company's facilities for the purpose of verifying such lists or inspecting the condition of Consignment Batteries.
(f) All public charges, whether in the nature of sales, occupational or other taxes or assessment or license fees, which shall be levied or assessed against the Consignment Batteries at the Company's facilities, or against the Company or WGL by reason hereof, by any federal, state or municipal authority, shall be paid by the Company.
(g) All Consignment Products shall remain the property of WGL and shall be held by the Company as such until withdrawn from the consigned stock and purchased by the Company pursuant to this Agreement. The Company will withdraw Batteries from the inventory of Consignment Batteries on a first-in-first-out basis for each Battery model.
(h) From time to time, as the Company shall purchase Batteries from WGL, it may withdraw the Consignment Batteries so purchased from WGL's consigned stock of the products at the Company's facility(s). Upon each such withdrawal for purchase by the Company pursuant to this Agreement, title to the Consignment Batteries so withdrawn shall pass to the Company.
(i) Upon expiration of this Agreement or in the event that this Agreement shall be terminated by the Company or WGL for any reason whatsoever, the Company shall purchase, or be deemed to have purchased from WGL, all of the remaining Consignment Batteries located at a Company facility, which met the Company's specifications and quality standards at the time of receipt, as of the date of expiration or termination, at the prices in effect at such time. Payment shall be made in accordance with Section 2.4.
(j) In the event that the Company changes the model mix of the Batteries which it requires, the Company agrees to purchase, within six (6) months, all units of Consignment Batteries which are no longer required by the Company.
2.6 Changes by WGL. WGL will not change the form, fit, or function of any Battery supplied to the Company without prior written notice.
2.7 Failure to Deliver Requirements.
Page 6 (a) If WGL is unable for any reason to deliver sufficient quantities of Batteries meeting the Company's specifications and quality standards to the Company to meet its requirements therefor which are set forth in the firm purchase order forecasts delivered pursuant to this Agreement, whether through replenishment of Consignment Batteries or otherwise, for a period of three (3) months, the Company shall have the right to purchase Batteries from third parties, including pursuant to a supply agreement with a third party for up to a one (1) year period if such a commitment is reasonably necessary in order for the Company to obtain Batteries from a third party; provided, however, that, upon the expiration of any such supply agreement or if Company does not enter into a binding supply agreement, as soon as the Company is able to deliver the Company's requirements, the Company shall resume purchasing its requirements of Batteries from WGL.
(b) In the event of fire, explosion, strikes, war, act of any governmental agency, material or labor shortage, transportation contingency, act of God or any other causes beyond the control of WGL ("Force Majeure"), WGL shall not be liable for any delay in shipment or non-delivery of Batteries covered by this Agreement arising from Force Majeure, and the Company shall be bound to accept the delayed shipment or delivery made within a reasonable time. In the event of Force Majeure, the Company shall be excused for the failure to take and pay for Batteries ordered under this Agreement, until such Force Majeure condition is removed. In the event such conditions cannot be corrected by the party affected within six (6) months of the date of the occurrence of a Force Majeure event, then the other party shall have the option to terminate this Agreement upon one (1) month prior notice.
2.8 Price Adjustment.
(a) If the Company shall not comply with the provisions of Article 3, then WGL shall have the right to increase the prices for all Batteries upon three (3) months prior notice. If the Company shall not accept any such new "pricing" for Batteries, then WGL shall have the option and right to terminate this Agreement upon not less than thirty (30) days prior notice. WGL agrees that the rights specified in this Section 2.8(a) shall be WGL's sole remedy if the Company does not comply with the provisions of Article 3 of this Agreement.
(b) The prices for Batteries provided for in this Article 2 are subject to upward modification, from time to time, by WGL during the period which commences after December 31, 1998 if WGL incurs a Battery Cost Increase. For purposes of this Section 3.4, the term "Battery Cost Increase" shall mean an increase by * or more in WGL's 1998 standard product cost for one or more of the Relevant Cost Factors listed in Section 1.8 above. The amount of any such permitted price increase for a Battery due to a
Page 7 Battery Cost Increase shall be determined as follows:
(i) In the case of Raw Material Costs, an amount equal to * times the amount of such Battery Cost Increase.
(ii) In the case of Regulatory Costs, it shall be * to the amount of any such Battery Cost Increase; and
(iii) In the case of New Design Costs, it shall be an amount equal * the amount of such Battery Cost Increase.
(c) If after any increase in a price for a Battery due to a Battery Cost Increase, there occurs a decrease of * or more over WGL's standard product costs (as adjusted by any such prior Battery Cost Increase) for such Battery for one or more of the Relevant Cost Factors listed in Section 1.8 above ("Battery Cost Decrease"), then WGL shall reduce the adjusted price for such Battery in the same manner and proportion as provided for in Section 2.8(b) for Battery Cost Increases; provided, however, that in no event shall the price for Batteries be reduced below the prices set forth in Section 2.2.
(d) If WGL is entitled and determines to impose a price increase under Paragraph (c) of this Section 2.8, WGL shall give not less than three (3) months written notice thereof in order that the forecasts provided for in Section 2.3 to be made by the Company can take into account any such price increase. WGL may not impose a price increase during the permitted period under Paragraph (b) of this Section 2.3 more frequently than once every Contract Year. WGL shall at the Company's written request make available appropriate records substantiating the basis for its determination that a Battery Cost Increase has occurred, or any Battery Cost Decrease, for audit at the Company's expense by an independent certified public accounting representative to verify the accuracy of the reports provided to the Company. Such representative shall execute a suitable confidentiality agreement reasonably satisfactory to WGL prior to conducting such audit. Such representative may disclose to the Company only its conclusions regarding the accuracy and completeness of such reports, and shall not disclose Confidential Information of WGL to the Company without the prior written consent of WGL. Any such request for an audit must be made by the Company within six months after any announced price increase under Paragraph (b) of this Section 2.3 or any announced price decrease under Paragraph (c) of this Section 2.3.
(e) Prior to imposing any increase in the price of Batteries due to a Battery Cost Increase for Raw Materials Costs, WGL shall allow the Company's purchasing department a period of one (1) month after the price increase notice referred to in Section
Page 8 2.8(d) to find alternative, qualified sources for any raw materials at a lower cost than those determined by WGL, and WGL shall be obligated to buy from any such lower cost sources before imposing any increase in the price of a Battery.
2.9 WGL Warranty. WGL warrants that the Batteries delivered to the Company will be free from defects in materials and workmanship at the time of sale. WGL's sole obligation under this warranty is the replacement of any Battery which is defective without charge. SELLER MAKES NO OTHER WARRANTY WITH RESPECT TO THE BATTERIES, WRITTEN OR ORAL, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THE COMPANY EXPRESSLY ASSUMES ALL LIABILITY ARISING FROM OR IN CONNECTION WITH THE USE OF THE BATTERIES PURCHASED HEREUNDER, WHETHER BASED ON CONTRACT, WARRANTY, TORT OR OTHERWISE AND AGREES TO HOLD WGL HARMLESS FROM SUCH CLAIMS.
3. NON-HYBRID PRODUCTS.
3.1 Product Development. Subject to all of the terms and conditions of this Agreement, the Company has agreed to purchase Non-Hybrid Products which meet the Company's specifications and quality standards, and the pricing guidelines contained in Section 3.3 below from WGL. The Company and WGL acknowledge and agree that WGL is not manufacturing or assembling any Non-Hybrid Products at the present time for the Company and that WGL must complete its design, tooling, plans and production lines for Non-Hybrid Products, and must qualify such products with the Company, prior to any purchases of such products by the Company from WGL. The Company agrees to provide WGL with all qualification protocols and requirements, plans, designs, specifications, drawings and other information in the Company's possession as reasonably requested by WGL ("Qualification and Design Data") which may be necessary or advisable in order for WGL to be able to manufacture Non-Hybrid Products for the Company and to cooperate with WGL in connection with WGL's efforts to qualify Non-Hybrid Products for Company purchase and use. Representatives of the Company and WGL who have authority to make decisions including, but not limited to, in the case of the Company, decisions with respect to qualification and purchasing, shall meet not less frequently than once every three (3) months to discuss WGL's progress in becoming qualified to supply Non-Hybrid Products to the Company and any issue which then may exist with respect to WGL's qualification efforts ("Progress Meetings"). If either the Company or WGL believes at any time that the other party is not fulfilling its obligations under this Article 3 with respect to qualification, it can request a meeting with the other party, upon reasonable notice, to discuss any issues or
Page 9 problems in that regard.
3.2 Purchase Commitment. Upon execution and delivery of this Agreement, the Company will provide WGL with * in purchase orders for Non -Hybrid Products each of which WGL reasonably believes that WGL can qualify and deliver during calendar years 1997-1998, a copy of which is attached hereto as Attachment C. The Company further agrees that during the term of this Agreement the Company will provide WGL with purchase orders for not less than (a) * (calculated by dollar cost) of the Company's requirements for each such Non-Hybrid Product in the twelve (12) months beginning with the month following the first date of qualification of each such Non-Hybrid Product by WGL in accordance with the Company's specifications and quality standards ("Initial 12-Month Period"); and (b) * (calculated by dollar cost) of the Company's requirements for each such Non-Hybrid Product after the Initial 12-Month Period. Subject to the other conditions of this Article 3, the Company shall be deemed to be in compliance with the purchase commitment requirements for Non-Hybrid Products of this Section 3.2 immediately upon the delivery to WGL of such purchase orders. Subject to the other provisions of this Article 3, the Company will not be deemed to be out of compliance with its purchase commitment due to failure of WGL to qualify any Non-Hybrid Product or to meet the pricing guidelines contained in Section 3.3 below, or to deliver any Non-Hybrid Products as covered by Section 3.10(d) below. Following any failure of WGL to qualify any such Non-Hybrid Product within six months after the Target Date For Qualification for such product, or to meet the pricing guidelines contained in Section 3.3 for any Non-Hybrid Product available to the Company from other qualified vendors, the Company shall have the right to place purchase orders with other qualified vendors for a sufficient quantity of such Non-Hybrid Product to satisfy its requirements for a period not to exceed twelve (12) months. During this 12-month period or thereafter, if WGL successfully qualifies such Non-Hybrid Product, the Company will provide WGL with purchase orders for delivery after the 12-month period for not less than * (calculated by dollar cost) of the Company's yearly requirements for such Non -Hybrid Product, as specified in (a) above. For purposes hereof, the term Target Date For Qualification shall mean the date for each separate Non-Hybrid Product which shall be specified in writing by WGL, when the Company issues its qualification order, subject to the Company's approval, which shall not be unreasonably withheld.
3.3 Pricing.
(a) Base Prices. "Base Prices" for Non-Hybrid Products shall mean the prices charged to the Company by WGL for Non-Hybrid Products, exclusive of tooling, shipping, and delivery charges. The Base Prices for certain Non-Hybrid Products are set forth on Attachment A which may be amended from time to time in a written instrument
Page 10 signed by authorized representatives of both parties to add additional Non-Hybrid Products to Attachment A. - Except for the price adjustments provided for in Section 3.4 below, pricing for the Non-Hybrid Products on Attachment A will remain fixed for the term of this Agreement. Base Prices for Non-Hybrid products not initially included in Attachment A which the Company is currently purchasing shall be fixed for the term of this Agreement at the average historical price that the Company has paid for each such Non-Hybrid Product during 1997. Subject to Section 3.4, Base Prices for newly designed Non-Hybrid products will be fixed for the term of this Agreement at the lower of (a) WGL's pricing, or (b) the average of the pricing available to the Company from two other qualified vendors.
(b) Tooling charges, which are over and above the Base Prices listed in Attachment A, shall be determined prior to or at the time WGL qualifies a Non-Hybrid Product. WGL may charge the Company tooling charges covering the entire cost of tooling for "L" Connector Assemblies and for Case Halves, but not for any other Non-Hybrid Products which the Company is currently purchasing from other vendors. To the extent that Company-owned tooling at the Company's current vendors (i) is in usable condition, (ii) is compatible with WGL's manufacturing machinery and (iii) can be transferred from the Company's current vendors. WGL shall, at its reasonable discretion, use such tooling rather than purchasing new tooling. Tooling charges may be charged by WGL for any new Non-Hybrid Product that it qualifies, but not for any new Non-Hybrid Product that it fails to qualify.
3.4 Permitted Price Adjustments.
(a) The Base Prices for Non-Hybrid Products provided for in this Article 3 are subject to increase, from time to time, by WGL if WGL, incurs a Non -Hybrid Cost Increase except that, in the case of changes in Raw Material Costs (other than costs related to precious metal, no such increase can be made prior to the second anniversary of the Effective Date. For purposes of this Section 3.5, the term "Non-Hybrid Cost Increase" shall mean an increase by * or more in WGL's standard product costs for one or more of the Relevant Cost Factors listed in Section 1.8 above (other than Raw Material Cost changes related to precious metals), determined as of the date WGL shall have qualified such product for sale to the Company. The amount of any such permitted price increase due to a Non-Hybrid Cost Increase shall be determined as follows:
(i) In the case of Raw Material Costs other than costs related to precious metals, it shall be an amount equal to * times the amount of such Non- Hybrid Cost Increase.
Page 11 (ii) In the case of Regulatory Costs, it shall be an amount * the amount of the Non-Hybrid Cost Increase.
(iii) In the case of New Design Costs, it shall be an amount equal * the amount of the Non-Hybrid Cost Increase.
If the cost of precious metals included in any Non-Hybrid Product increases or decreases from the Base Cost, then the Base Price for such Non- Hybrid Product will be increased or decreased, as the case may be by an amount equal * times the change in the Base Cost. Any such change may be made at any time during the term of this Agreement but not more frequently than once every two months. For purposes hereof, the "Base Cost" shall mean the price of the precious metal on the date of this Agreement as reported in the Wall Street Journal; and changes in the Base Cost for any precious metal shall be determined by changes in the prices for the metal as reported in the Wall Street Journal.
(b) If after any increase in a price for a Non-Hybrid Product due to a Non-Hybrid Cost Increase, there occurs a decrease of * or more over WGL's standard product costs (as adjusted by any such prior Non-Hybrid Cost Increase) for such Non-Hybnd Product for one or more of the Relevant Cost Factors listed in Section 1.8 above ("Non-Hybrid Cost Decrease"), then WGL shall reduce the adjusted price for such Non- Hybrid Product in the same manner and proportion as provided for in Section 3.4(a) for Non-Hybrid Cost Increases; provided, however, that in no event shall the price for any such Non-Hybrid Product be reduced below the Base Price for such Non-Hybrid Product.
(c) If WGL is entitled and determines to impose a price increase under this Section 3.4, WGL shall give not less than three months' written notice thereof. For Non-Hybrid Products other than those fabricated from precious metals, WGL may not impose a price increase more frequently than once every six (6) months. The prices for Non-Hybrid Products fabricated from precious metals may be increased more frequently as provided for in Section 3.4(a). WGL shall deliver to the Company together with the notice provided for herein a written report which describes in reasonable detail the basis for WGL's determination that a price increase is permitted under this Section 3.4. WGL shall at the Company's written request make available appropriate records substantiating the basis for its determination that a Non-Hybrid Cost Increase has occurred, or any Non-Hybrid Cost Decrease, for audit at the Company's expense by an independent certified public accounting representative to verify the accuracy of the reports provided to the Company. Such representative shall execute a suitable confidentiality agreement reasonably satisfactory to WGL prior to conducting such audit. Such representative may disclose to the Company only its conclusions regarding the accuracy and completeness of such reports, and shall not disclose Confidential Information of WGL to the Company without the prior written consent
Page 12 of WGL. Any such request for an audit must be made by the Company within six (6) months of any announced price increase hereunder.
(d) Prior to imposing any increase in the price of Non-Hybrid Products due to a Non-Hybrid Cost Increase for Raw Material Costs, WGL shall allow the Company's purchasing department a period one (1) month after the price increase notice referred to in Section 2.8(d) to find alternative, qualified sources for any raw materials at a lower cost than those determined by WGL, and WGL shall be obligated to buy from any such lower cost sources before imposing any increase in the price of a Non-Hybrid Product.
3.5 Additional Non-Hybrid Products. The Company agrees that it will notify WGL of all Non-Hybrid Products for new and existing models of its implantable medical devices, or modifications of existing models, which are not Micro-Electronic Components. In connection therewith, at WGL's request, the Company will provide WGL with Qualification and Design Data for each such new and existing Non-Hybrid Product and cooperate with WGL in connection with WGL's efforts to qualify for the supply of such Non-Hybnd Product to the Company, including participation in Progress Meetings. The Company and WGL agree that Attachment A will be amended in writing, from time to time as specified in Section 3.3 above, to reflect all such additions.
3.6 License. The Company hereby grants WGL a license or sublicense (as applicable) to use any and all Qualification and Design Data, and all patents, copyrights and know-how which the Company owns, or which it has the right to use and sublicense, which cover Non-Hybrid Products, solely in connection with WGL's manufacture and supply of Non-Hybrid Products to the Company. This license shall permit WGL to subcontract out the manufacture the production of Non-Hybrid Products.
3.7 Estimated Annual Usage.
(a) "Estimated Annual Usage" as used herein shall mean the quantities of Non-Hybrid Products which the Company estimates as its needs for Non -Hybrid Products from WGL for the ensuing twelve (12) month period and will be subject to the minimum purchase quantities specifed in Section 3.2 above. Initial Estimated Annual Usages for each of the initial Non-Hybrid Products shall be specified in Attachment A. As additions are made to the Non-Hybrid Products specified in Attachment A as provided in Section 3.3 above, the Company shall provide written notice as to the initial Estimated Annual Usage for each Non-Hybrid Product so added at the time of addition to the Non-Hybrid Products specified in Attachment A.
(b) As soon as practicable after WGL qualifies a Non-Hybrid Product as
Page 13 contemplated by this Article 3, the Company will provide WGL with its Estimated Annual Usage for that Non-Hybrid Product, and will provide WGL with a twelve (12) months forecast stating anticipated needs. This forecast will provide WGL with a total of twelve (12) months projected requirements for planning purposes. Such forecast will be updated each succeeding calendar quarter.
(c) WGL shall not be required to manufacture more than * of the Company's twelve (12) month Estimated Annual Usage of a Non-Hybrid Product in any one three (3) month period, except upon not less than a three (3) month prior written notice. The sole exception to this provision shall be if WGL has fallen behind on past deliveries due to its own fault, in which case WGL shall be required to manufacture and deliver each month up to * more than the average monthly quantities which were scheduled for the preceding three-month period until WGL is back on schedule with its deliveries.
3.8 Supplier Inventory. "Supplier Inventory" shall mean those quantities of Non-Hybrid Products which WGL is required by this Agreement to maintain. The levels of Supplier Inventory for each of the Non-Hybrid Products shall not exceed twenty-five percent (25%), and the specific level for each Non-Hybrid Product shall be as specified in Attachment A. WGL must be capable of shipping its entire Supplier Inventory of any and/or all Non-Hybrid Products to the Company as finished goods within a period of not less than seven (7) nor more than twenty-one (21) days. The specific period which is applicable for each Non-Hybrid Product shall be as specified in Attachment A.
3.9 Maintenance of Supplier Inventory by WGL.
(a) Build-Up of Supplier Inventory. It is recognized by the parties that at the outset of this Agreement, or at the time new Non-Hybrid Products are added to this Agreement, WGL may not have sufficient Supplier Inventory to meet the requirements of this Agreement. WGL agrees that within a period of not more than three (3) months from the date of qualification of each Non-Hybrid Product it shall possess sufficient Supplier Inventory to meet the requirements of this Agreement as to all Non-Hybrid Products included in this Agreement at the date of execution of the Agreement. WGL further agrees that within a period of not more than three (3) months from the date of qualification of any new Non-Hybrid Product(s) under this Agreement, WGL shall possess sufficient Supplier Inventory to meet the requirements of this Agreement as to those Non- Hybrid Products added to this Agreement. When Company provides WGL with an update in Company's Estimated Annual Usage for one or more of the Products specified in Attachment A as provided in Section 3.7 above, and when Estimated Annual Usage for any Non-Hybrid Product has increased from a previous Estimated Annual Usage, WGL agrees to use its best efforts to increase the level of Supplier Inventory for the affected Non-Hybrid Product(s) within a
Page 14 period of forty (40) days from the date that Company notifies WGL of the increase in Company's Estimated Annual Usage for the affected Non -Hybrid Product(s).
(b) Agreement by WGL to Maintain Supplier Inventory. During the Term of this Agreement, and subject to the limitations of Sections 3.9(a) above and 3.9(c) below. WGL agrees to maintain sufficient Supplier Inventories of the Non-Hybrid Products to meet the requirements of this Agreement.
(c) Replenishment of Supplier Inventory. In the event that the Supplier Inventories of any or all of the Non-Hybrid Products are totally depleted, WGL agrees to use its best efforts to replenish the Supplier Inventories within a period of forty (40) days.
(d) Reductions in Supplier Inventories. When the Company provides WGL with an update in Company's Estimated Annual Usage for one or more of the Non-Hybrid Products specified in Attachment A, as provided in Section 3.7 above, and when the Estimated Annual Usage for any Non -Hybrid Product(s) has dropped from a previous Estimated Annual Usage, WGL agrees to reduce the level of Supplier Inventory for the affected Product(s) by not rebuilding inventory as it is provided to the Company until the level of Supplier Inventory for the affected Non- Hybrid Product(s) drops to the most recent Estimated Annual Usage level. Within one month after the end of each Contract Year, WGL shall review the level of Supplier Inventory of each Non-Hybrid Product then maintained by WGL. If based on the Company's actual usage of any Non -Hybrid Product in such prior Contract Year, WGL is holding Supplier Inventory of any Non-Hybrid Product in excess of the level required for such Non-Hybrid Product, the Company, at WGL's request, shall take delivery and purchase any such excess Supplier Inventory of that Non-Hybrid Product within two months after the end of such Contract Year.
(e) Location of Non-Hybrid Product Inventories. WGL agrees to maintain the Supplier Inventories of the Non-Hybrid Products in the Clarence, NY area from which the Supplier Inventories of the Non -Hybrid Products can be shipped within the seven (7) to twenty-one (21) working day period as specified in Section 3.8 above.
(f) Delivery of the Non-Hybrid Products. WGL agrees to properly manage its supplies of raw materials, work-in-progress, and finished goods in order to ensure that it will be capable of shipping the entire Supplier Inventory as finished goods within the seven (7) to twenty-one (21) working day period as specified in Section 3.7 above, except and only to the extent that WGL is delayed in shipping a portion of the Non- Hybrid Products in the Supplier Inventories due to WGL being in the process of building or timely renewing the Supplier Inventories of the Products pursuant to Sections 3.9(a) and 3.9(c) above.
Page 15 3.10 Purchase of Non-Hybrid Products by the Company.
(a) Orders: Non-Hybrid Products shall be ordered by the Company from WGL with purchase orders issued from time to time by the Company. Acceptance by WGL of such purchase orders submitted by the Company shall create a contract for sale and purchase on the terms and conditions contained in this Agreement.
(b) Purchase of Supplier Inventories. Upon expiration of this Agreement or in the event that this Agreement shall be terminated by the Company or WGL for any reason whatsoever, the Company agrees to purchase the Supplier Inventories of the Non-Hybrid Products from WGL to the extent that WGL is in compliance with the terms of this Agreement governing the levels of the Supplier Inventories. The Company will not be required to purchase excess inventories from WGL to the extent that such inventories exceed the most recent level of Estimated Annual Usage provided by the Company, except and only to the extent that the excess inventory was due to reduction(s) in the Estimated Annual Usage levels provided by the Company without sufficient intervening purchases by the Company to allow the levels of the Supplier Inventories to drop to the most recent Estimated Annual Usage levels.
(c) Option to Purchase Supplier Inventories As Is. At the Company's option, WGL will supply the Supplier Inventories of Non-Hybrid Products to the Company either as finished goods within one (1) month after termination of the Agreement, or as the combination of raw materials, work-in-progress, and/or finished goods remaining upon termination of the Agreement within one (1) month after of termination of the Agreement. The parties shall negotiate prices to be paid by the Company to WGL for Non-Hybrid Products which are work-in-progress or in raw material form.
(d) Failure to Deliver:
(i) If WGL is unable for any reason, and other than as provided for in Paragraph (iii) of this Section 3.10(d), to deliver sufficient quantities of any Non-Hybrid Product meeting the Company's specifications and quality standards to the Company to meet its requirements therefore which are set forth in the firm purchase order forecasts delivered pursuant to this Agreement, and WGL is not able to remedy this situation for a period of three (3) months, the Company shall have the right to place purchase orders with other qualified vendors for sufficient quantity of such Non-Hybrid Product to satisfy its requirements for a period not to exceed six (6) months, except that with respect to the following categories of Non-Hybrid Products the time period may be up to twelve (12) months: (A) feed-throughs, (B) Ti Nitrate machined parts, (C) L-connector assemblies and (D) case halves having an annual requirement of * units or less. After the applicable
Page 16 period, if WGL successfully re-establishes its ability to deliver such Non-Hybrid Product, the Company will resume purchasing such Non- Hybrid Product from WGL at the rate specified in Section 3.2 above, i.e., at a forty percent (40%) rate if the supply disruption occurs during the first year after initial qualification, or at an eighty percent (80%) rate if the supply disruption occurs during the second or subsequent years after initial qualification of such Non-Hybrid Product.
(ii) In the event of Force Majeure, WGL shall not be liable for any delay in shipment or non-delivery of Non-Hybrid Products covered by this Agreement arising from Force Majeure, and the Company shall be bound to accept the delayed shipment or delivery made within a reasonable time. In the event of Force Majeure, the Company shall be excused for the failure to take and pay for Non-Hybrid Products ordered under this Agreement, until such Force Majeure condition is removed. In the event such conditions cannot be corrected by the party affected within six (6) months of the date of the occurrence of a Force Majeure event, then the other party shall have the option to terminate this Agreement upon one (1) month prior notice.
(iii) If the Company (A) rejects or refuses to accept any Non-Hybrid Product from WGL on the basis of quality, failure to meet or maintain then current product specifications or qualification standards, or some other similar or comparable reason and (B) would otherwise purchase a Non -Hybrid Product from one or more third parties in amounts which would result in the Company not satisfying the applicable quota set forth in Section 3.2, then the Company shall send WGL a written notice which sets forth (1) the product involved and (2) the basis upon which it has determined that WGL is not satisfactorily delivering the Company's requirements of the Non-Hybrid Product at issue ("Non-Delivery Notice"). At WGL's written request, the Company agrees to provide one or more senior managers of the Company to meet with representatives of WGL to review the reasons set forth in the Company's Non-Delivery Notice, and to discuss and, if practicable, establish an action plan to correct any deficiency or failure by WGL in order that the Company shall purchase or resume purchasing Non-Hybrid Products.
4. NON-HYBRID GENERAL TERMS
4.1 Delivery. WGL shall deliver Non-Hybrid Products to the Company's facility at Valley View Court in Sylmar, California, and/or to such other location(s) as the Company may designate. Unless the Company gives WGL written instructions as to the method of shipment and carrier, WGL shall select the methods of shipment and the carrier for the respective purchase order. WGL shall prepay transportation and similar charges upon shipment. Title to all Non-Hybrid Products conforming to the Company's purchase order
Page 17 shall pass, free and clear of all encumbrances, at the FOB shipping point, which shall be WGL's facility.. The Company assumes and agrees to bear all risk of damage or loss to the goods after delivery by WGL to the carrier at the FOB shipping point. The Company hereby releases WGL from any and all claims and liability with respect to any such in-transit damages or losses to the goods. The Company shall be responsible for securing insurance coverage to cover shipments and deliveries hereunder.
4.2 Acceptance. The Company may reject any shipments or deliveries of Non-Hybrid Products which are short, nonconforming, defective or deficient and may request correction and/or replacement. Rejected shipments or deliveries of Non-Hybrid Products shall at the request of WGL be set aside for WGL inspection, or at the request of WGL shipped freight prepaid to WGL. All Non-Hybrid Products returned to WGL shall be accompanied by a copy of their original shipping documents and the name and phone number of the person at the Company to be contacted regarding such return. Promptly upon receipt of notice of such shortage, non-conformance, defect or deficiency, WGL shall immediately notify the Company:
(a) as to how WGL will replace the defective or deficient Non-Hybrid Products upon return to WGL, ship replacement Non-Hybrid Products, or otherwise promptly correct such shortage, non-conformance, or deficiency; and/or
(b) whether such shipment of Non-Hybrid Products shall be set aside and held by the Company or returned to WGL and the address to which such affected Non-Hybrid Products should be returned, or whether such Products should otherwise disposed of.
If the Company elects to cancel or rescind such purchase, WGL shall promptly refund and reimburse the Company the price paid by the Company for such purchase, including freight and shipping costs incurred by the Company in such purchase, prior to the return of the same to WGL. If the Company elects to have the Non-Hybrid Product replaced, WGL shall bear or shall reimburse the Company for all costs and expenses incurred by the Company to repackage, ship and return affected Non-Hybrid Products to WGL and shall issue a credit memo for the amount of the purchase price of the returned Non-Hybrid Products.
4.3 Payment. WGL shall be paid directly by the Company the sum of the applicable Base Prices for each Product plus all tooling, shipping and delivery charges actually incurred by WGL for each shipment of the Products to the Company. Invoices shall be on or after the date on which the Product(s) specified on the invoice are shipped to the Company.
Page 18 4.4 Drawings Used In Manufacture. Only Company drawings shall be used by WGL to manufacture Non-Hybrid Products; WGL drawings shall only be used for reference.
4.5 Good Manufacturing Procedures. Products shall be manufactured and tested by WGL in accordance with all applicable U.S. laws and United States Food and Drug Administration (FDA) regulations, including but not limited to the FDA's current Good Manufacturing Practice regulations in effect at the time of such manufacture or testing. WGL shall notify the Company of any FDA inspection of its production facilities used to manufacture any Non-Hybrid Products and shall furnish the Company with copies of any Form 483 report and Establishment Inspection Reports to the extent that they apply to any product.
4.6 Violation of Law. The Company and WGL shall each strictly observe and comply with all federal and local laws and regulations which may govern the manufacture, sale, handling and disposal of any Non-Hybrid Products herein specified. Violation of any such law or regulation may be viewed as a breach of this Agreement, and may be cause for termination or suspension of sales hereunder. Nothing herein shall be construed to allow either party the right to cancel this Agreement for any inadvertent error or minor violation of any law or regulation by the other party.
4.7 Inspection and Acceptance. WGL shall perform testing to ensure that the Non-Hybrid Products meet all applicable specifications. The Company inspection of incoming Non-Hybrid Products will rely upon WGL testing and may consist of an examination of WGL's testing documentation as well as independent testing by the Company.
4.8 Source Inspectors. The Company shall have the right, upon reasonable notice, to send source inspectors to WGL's facilities for the purpose of monitoring WGL's performance under this Agreement.
4.9 Warranty.
(a) WGL warrants that each of the Non-Hybrid Products delivered to the Company will meet all applicable specifications and will be free from defects in materials and workmanship at the time of sale. WGL's sole obligation under this Warranty is the repair or replacement, at its election, of any Non-Hybrid Product which is found, upon WGL's inspection not to meet such warranty. Such product will be repaired or replaced without charge provided that, (1) prior written approval is required before returning any product, and (2) any product return sent to WGL without prior written approval will be returned to the sender, freight collect.
Page 19 (b) This Warranty does not apply to depletion, wear and/or any failure occurring as a result of any of the following: normal use, abuse, misuse, any alteration or modification made to any Non-Hybrid Product without the express written consent of WGL, attempted disassembly, neglect, improper installation, or any other use inconsistent with any applicable law, rule, regulation or governmental directive, or any use inconsistent with the specifications or warning or recommended operating practices specific to the Non-Hybrid Product.
(c) THE WARRANTY SET FORTH IN THIS SECTION 4.9 IS IN LIEU OF ALL OTHER WARRANTIES (EXCEPT OF TITLE), EXPRESSED, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
5. ASSEMBLY OPERATION
5.1 Phoenix Site. Subject to the terms and conditions of this Agreement, WGL presently intends to establish an assembly facility in the Phoenix, Arizona area to provide pre-assembly of Non-Hybrid Products to be supplied by WGL to the Company, and any components to be supplied by other vendors, up to the point of integration with the Company's hybrid circuitry. WGL shall not finalize its plans for an assembly facility in the Phoenix area until WGL and the Company shall have agreed in writing upon the level of assembly work and annual volume requirements, which agreement is a precondition to WGL's establishment of such a facility. If the parties do so agree that WGL shall do assembly for the Company, WGL will establish a Phoenix assembly facility and, in such event, the parties will renegotiate the Supplier Inventory requirements set forth in Article 3.
5.2 Pricing. The parties agree to negotiate in good faith the amount which WGL will charge for such assembly.
5.3 Timing. The parties anticipate that WGL would establish its Phoenix facility when it has qualified and has begun to produce a substantial amount of the non-hybrid components for the Company implantable medial devices, but, in any event, no later than December 31, 1999.
5.4 Limitation. This Section 5 is written merely as a statement of the intentions of the parties, and the parties do not intend to be legally bound by it. The full terms and conditions of this subassembly manufacturing arrangement shall be contained in a separate agreement which will be negotiated between the parties. Upon execution of that
Page 20 agreement, the parties will become legally bound under the terms and conditions of that agreement.
6. LIMITATION OF LIABILITY; COMPLIANCE WITH LAW.
6.1 LIMITATION OF LIABILITY. THE REMEDIES OF THE COMPANY IN THE WARRANTY SET FORTH IN SECTION 2.9 WITH RESPECT TO BATTERIES AND IN THE WARRANTY SET FORTH IN SECTION 4.9 WITH RESPECT TO NON-HYBRID PRODUCTS ARE EXCLUSIVE, AND THE TOTAL LIABILITY OF WGL WITH RESPECT TO ANY BATTERY OR ANY NON-HYBRID PRODUCT SOLD TO THE COMPANY, IN CONNECTION WITH THE PERFORMANCE THEREOF, OR FROM THE SALE, DELIVERY, INSTALLATION OR REPAIR COVERED BY OR FURNISHED UNDER ANY SALE TO THE COMPANY WHETHER BASED ON CONTRACT, WARRANTY, NEGLIGENCE, INDEMNITY, STRICT LIABILITY, OR OTHERWISE SHALL NOT EXCEED THE PURCHASE PRICE OF THE PRODUCT UPON WHICH SUCH LIABILITY IS PLACED. WGL SHALL IN NO EVENT BE LIABLE TO THE COMPANY, OR TO ANY SUCCESSOR IN INTEREST OR ANY BENEFICIARY OR ASSIGNEE THEREOF, RELATING TO THE SALE OF ANY BATTERY OR ANY NON-HYBRID PRODUCT FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF SUCH SALE OR ANY DEFECTS IN, OR FAILURE OF, OR MALFUNCTION OF THE PRODUCT UNDER SUCH SALE, INCLUDING BUT NOT LIMITED TO, DAMAGES BASED UPON LOSS OF USE, LOST PROFITS OR REVENUE, INTEREST, LOST GOODWILL, INCREASED EXPENSES AND/OR CLAIMS OF CUSTOMERS OF THE COMPANY, WHETHER OR NOT SUCH LOSS OR DAMAGE IS BASED ON CONTRACT, WARRANTY, NEGLIGENCE, INDEMNITY, STRICT LIABILITY OR OTHERWISE.
6.2 FDA Compliance. During the term of this Agreement the Company shall have responsibility for obtaining at its expense, in its name and at its discretion any necessary device regulatory approvals from the U.S. Food and Drug Administration (i.e. PMA's or 501 (k)'s as the case may be), and applicable regulatory agencies of such other countries in which product incorporating the Batteries or Non-Hybrid Products will be sold. WGL shall supply the Company with all documents, instruments, information, reports and advice and general assistance as is necessary to complete, and as is reasonably requested by the Company in connection with such regulatory approval efforts.
6.3 WGL Compliance. WGL shall be responsible for compliance with present and future applicable statutes, laws, ordinances and regulations of United States and
Page 21 foreign national, federal state and local governments relating to the manufacture and, except as otherwise provided in Section 6.2 above, the sale of Batteries and Non-Hybrid Products to the Company under this Agreement. Upon not less than three (3) business days' notice, WGL will provide such Company personnel as the Company reasonably deems appropriate with reasonable access from time to time to WGL's facilities and records for the purpose of confirming WGL's compliance with requirement as noted in this Section, and for the further purpose of confirming, if reasonably deemed necessary by the Company, WGL's compliance with applicable specifications for Batteries and Non-Hybrid Products.
7. TERM AND TERMINATION
7.1 Tenn. This Agreement shall become binding and enforceable on the date upon which it is fully executed by the parties hereto (Effective Date"), and this Agreement shall continue in force for a term through December 31, 2001.
7.2 Termination. Notwithstanding the provisions of Section 7.1 above, this Agreement may be terminated in accordance with the following provisions:
(a) A party may terminate this Agreement by giving notice in writing to the other party in the event the other party is in breach of any material representation, warranty or covenant of this Agreement and shall have failed to cure such breach within three (3) months after receipt of written notice thereof from the first party;
(b) A party may terminate this Agreement at any time by giving notice in writing to the other party, which notice shall be effective upon dispatch, should the other party file a petition of any type as to its bankruptcy, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership; or
(c) A party may terminate this Agreement by giving notice in writing to the other party should an event of Force Majeure continue for more than six (6) months.
7.3 Rights and Obligations on Termination. Termination of this Agreement shall not release either party from the obligation to make payment of all amounts previously due and payable, or which become due and payable due to termination of this Agreement.
Page 22 8. COMPANY AFFILIATES; NO OTHER BENEFICIARIES
8.1 Company Affiliates. The Company hereby represents and warrants to WGL that it has the power, authority and approval to bind its Affiliates to the provisions of Articles 2 and 3 of this Agreement with respect to the purchase of their requirements for Batteries and Non- Hybrid Products. The Company hereby acknowledges that WGL has agreed to the pricing for the Batteries and Non-Hybrid Products in reliance upon the foregoing representatives and warranties of the Company.
8.2 No Other Beneficiaries. Except as provided for in Section 6.1, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
9. CONFIDENTIALITY
9.1 Treatment of Propriety Information. Each of WGL and the Company (each a "receiving party") agrees to maintain all proprietary information disclosed by the other party to this Agreement (each a "disclosing party") in strict secrecy and confidence, and not to disclose such proprietary information to any third party, nor make any use of such information and technology for its own benefit or gain other than in carrying out its efforts under this Agreement. The receiving party agrees to have its employees sign agreements, or to have an appropriate corporate policy in effect, which requires them to keep confidential any proprietary information they learn in their positions at the receiving party; these agreements and/or policies shall require them to maintain confidentiality of proprietary information disclosed by the disclosing party. The receiving party further agrees that no proprietary information or materials will be supplied to any other corporation, partnership, laboratory, or individuals other than those approved in writing by the disclosing party, with the exception of disclosure to the FDA and similar regulatory agencies of information relative to obtaining regulatory approval.
9.2 Limited Release. The receiving party shall be released from the obligations of Section 9.1 to the extent that any of the disclosed information: (a) was already part of the public domain at the time of the disclosure by the disclosing party; (b) becomes part of the public domain through no fault of the receiving party (but only after and only to the extent that it is published or otherwise becomes part of the public domain); (c) was in the receiving party's possession prior to the disclosure by the disclosing party and was not acquired, directly, or indirectly, from the disclosing part or from a third party who was under a continuing obligation of confidence to the disclosing party; (d) is received (after the disclosure by the disclosing party) by the receiving party from a third party who did not require the receiving party to hold it in confidence and did not acquire it directly or indirectly, from the disclosing party under a continuing obligation of
Page 23 confidence; or (e) is disclosed by the receiving party pursuant to judicial compulsion, provided that the disclosing party is notified at the time such judicial action is initiated. In addition, notwithstanding Section 9.1, WGL may provide proprietary information of the Company to its subcontractors and vendors without Company's prior approval provided that WGL first requires any such subcontractor or vendor to sign a confidentiality agreement which requires them to keep confidential such Company information and not to use it except for the purpose of performing their obligations to WGL.
9.3 Term of Obligation. The obligation of the receiving party to receive and hold information disclosed by the disclosing party in confidence, as required by this Section 8, shall terminate eight (8) years from the date of disclosure of the information hereunder and shall survive any earlier termination of this Agreement.
9.4 Disposal Upon Termination. In the event this Agreement is terminated, any samples, sketches, or other proprietary material provided by the disclosing party to the receiving party shall be destroyed or returned to the disclosing party, unless and to the extent such materials are necessary to the receiving party to provide continuing support.
10. MISCELLANEOUS
10.1 Relationship. This Agreement does not make either party the employee, agent, legal representative or partner of the other for any purpose whatsoever. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied. on behalf of or in the name of the other party. In fulfilling its obligations pursuant to this Agreement, each party shall be acting as an independent contractor.
10.2 Assignment. This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective permitted successors and assigns. It may not be voluntarily assigned in whole or in part by either party without the prior written consent of the other; provided, however, that a successor in interest by merger, by operation of law, purchase or otherwise of the entire business of either party shall acquire all interest of such party hereunder, and further provided that a party may assign this Agreement to an Affiliate of such party (the patty to this Agreement who makes any such assignment to an Affiliate shall, notwithstanding such assignment, remain fully responsible for assuring, and for any failure to assure, prompt performance by such Affiliate of all of such assigning party's obligations under this Agreement). Any prohibited assignment shall be null and void.
10.3 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all previous proposals or agreements, oral or written, and all negotiations, conversations or discussions heretofore had
Page 24 between the parties related to the subject matter of this Agreement. The pates expressly agree that none of the terms and conditions of any standard preprinted forms used by either WGL or the Company in effectuating the purchase and sale transactions contemplated by this Agreement (including, but not limited to, purchase orders, acknowledgements and acceptance forms, invoices, labels and shipping documents) which are inconsistent with, or in addition to, those contained in this Agreement shall have any force or effect.
10.4 Governing Law. This Agreement shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York.
10.5 Waiver, Discharge, etc. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties to this Agreement by their duly authorized representatives. The failure of either party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of either party after any such failure to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.
10.6 Titles and Headings; Construction. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted. When reference is made in this Agreement to a "month" or to "months" (e.g., "three (3) months notice"), it shall mean a period commencing on a specific day of a month (e.g., the 15th) and continuing to the corresponding day of a later month (e.g., three (3) months from April 15 would mean a period ending on the next succeeding July 15).
10.7 Notices. All notices or other communications to a party required or permitted hereunder shall be in writing and shall be delivered personally, by courier or by telecopy (receipt confirmed) to such party (or, in the case of an entity, to an executive officer of such party) or shall be given by certified mail, postage prepaid with return receipt requested, addressed as follows: if to WGL, to:
Wilson Greatbatch Ltd.
10,000 Wehrle Drive Clarence, New York 14031
Attention: Edward F. Voboril, President and Chief Executive Officer
Page 25 and if to the Company, to:
Pacesetter, Inc. 15900 Valley View Court Sylmar, CA 91342 Attention: General Counsel
WGL or the Company may change their respective above-specified recipient and/or mailing address by notice to the other party given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail).
9.8 Severability. If any provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions shall nonetheless be enforceable according to their terms.
9.9 Execution of Further Documents. Each party agrees to execute and deliver without further consideration any further applications, licenses, assignments or other documents, and to perform such other lawful acts as the other party may reasonably require to fully secure and/or evidence the rights or interests herein.
WILSON GREATBATCH LTD. PACESETTER, INC., A ST. JUDE MEDICAL COMPANY
By: /s/ Edward F. Voboril By: /s/ Patrick Forteau ------
Title: President/CEO Title: President ------
Date: April 22, 1997 Date: April 21, 1997 ------
Page 26 ATTACHMENT A NON-HYBRID PRODUCTS LIST
======MINIMUM DAYS TO WGL TARGETED *ESTIMATED ANNUAL INVENTORY SHIP QUALIFICATION 1997 ANNUAL UNIT USAGE FROM WGL PERCENT SUPPLIER P/N REV DESCRIPTION DATE REQUIREMENT PRICE 40% 80% HELD BY WGL INVENTORY ======5041534-099 H SET SCREW ALL Qualified Now * * * * 7 ------5015435-001 B THUMBSCREW MOST LEADS 6/1/97 * * * * 7 ------6041701-001 B WASHER/1388 LEADS (2 PER) 6/1/97 * * * * 7 ------6041702-001 C HELIX SHAFT 1188/1388 6/1/97 * * * * 7 ------6041700-002 U TIN ELECTRODE RING/1388 1/1/98 * * * * 14 ------6041700-098 U ELECTRODE RING/1188 6/1/97 * * * * 14 ------6041641-003 J ELECTRODE RING TIN/1242 1/1/98 * * * * 14 ------6041641-004 J ELECTRODE RING TIN/1238, 1246 1/1/98 * * * * 14 ------6041743-001 G DISTAL ELECTRODE TIP/ALL 6/1/98 * * * * 21 ------64-16-759 0 TIN TIP 1/1/98 * * * * 14 ------62-02-506 1 TIN TIP 1/1/98 * * * * 14 ------61-12-523 2 TIN RING 1/1/98 * * * * 14 ------7001630-001 H "L" CONNECTOR ASSEMBLY/ALL 1/1/98 * * * * 21 ------7001441-012 H "L" CONNECTOR/MICRONY 1/1/98 * * * * 21 ------1040175-001 K COIL/TRILOGY 1/1/99 * * * * 7 ------63-87-075 0 COIL/MICRONY/REGENCY 1/1/99 * * * * 7 ------6010987-001 C TRILOGY CASE HALF 1/1/98 * * * * 14 ------6010987-002 C TRILOGY CASE HALF 1/1/98 * * * * 14 ------6011117-098 J AFFINITY CASE HALF 1/1/98 * * * * 14 ------6011117-099 J AFFINITY CASE HALF 1/1/98 * * * * 14 ------62-31-463 1 REGENCY CASE HALF 1/1/98 * * * * 14 ------62-31-471 0 REGENCY CASE HALF 1/1/98 * * * * 14 ------
Page 1 ATTACHMENT A NON-HYBRID PRODUCTS LIST
======MINIMUM DAYS TO WGL TARGETED *ESTIMATED ANNUAL INVENTORY SHIP QUALIFICATION 1997 ANNUAL UNIT USAGE FROM WGL PERCENT SUPPLIER P/N REV DESCRIPTION DATE REQUIREMENT PRICE 40% 80% HELD BY WGL INVENTORY ======62-01-854 2 MICRONY CSE HALF 1/1/98 * * * * * 14 ------62-01-847 2 MICRONY CASE HALF 1/1/98 * * * * * 14 ------1080376-001 E QUAD FEEDTHRU/TRILOGY 1/1/99 * * * * * 21 ------63-27-659 0 FEEDTHRU 1/1/99 * * * * * 21 ------63-27-634 1 FEEDTHRU 1/1/99 * * * * * 21 ------6041696-002 D SPACER 6/1/97 * * * * * 7 ------6041504-099 J SET SCREW Qualified Now * * * * * 7 ------6041697-001 D RING 6/1/97 * * * * * 7 ------6041703-001 B STOPPER 6/1/97 * * * * * 7 ------6041783-097 G COATED ELUT. TIP 6/1/98 * * * * * 1 ------6041555-001 G CONNECTOR PIN 6/1/97 * * * * * 7 ------6041266-002 U PROXIMAL RING 6/1/97 * * * * * 7 ------
* Quantity Indicates applicable estimated usage.
Page 2 ATTACHMENT B
WGL CUSTOM POWER SOURCE DEVELOPMENT PRICING
For power sources other than standard WGL production cells the following development charges will apply:
A. Lithium Iodine Power Sources (Pacemaker Applications) a. Shapes that are 5 mm or greater in thickness
1. * upon submission of the purchase order. 2. * three (3) months after submission of purchase order. 3. * upon shipment of prototype units. 4. * upon shipment of implantable grade cells. 5. Development charges are not refundable. 6. Cell will remain proprietary for two (2) years after shipment of first implantable grade unit. 7. Price per cell will be in accordance with Section 22(a) of this Agreement. 8. In the event Company requests the cell to continue exclusivity in perpetuity the following course of action will apply: o Upon shipment of the *th unit in the same model configuration, a letter stating intent of exclusivity in perpetuity will be sent to WGL and an additional payment of * will be required.
9. Any term or condition not covered above will be negotiated at the time of order. b. Shapes that are less than 5 mm thick.
1. * upon submission of the purchase order. 2. * three (3) months after submission of purchase order. 3. * upon shipment of prototype units. 4. * upon shipment of implantable grade cells. 5. Development charges are not refundable. 6. Cell will remain proprietary for two (2) years after shipment of first implantable grade unit. 7. Price per cell will be in accordance with Section 2.2(b) of this Agreement. 8. In the event the Company requests the Cell to continue exclusivity in perpetuity the following course of action will apply: o Upon shipment of the *th unit in the same model configuration, a letter stating intent of exclusivity in perpetuity will be sent to WGL and an additional payment of * will be required. 9. Any term or condition not covered above will be negotiated at the time of order.
B. Solid Cathode Multiplate Power Sources (High Rate Defibrillator Applications) a. All shapes using standard technology including change of existing shapes. Standard is defined as a rectangular shape with eight cathode plates or less and manufactured with current assembly techniques. WGL reserves the right to classify a cell as non-standard at the time of purchase order placement.
1. * upon submission of the purchase order. 2. * three (3) months after submission of purchase order. 3. * upon shipment of prototype units. 4. * upon shipment of implantable grade cells. 5. Development charges are not refundable. 6. Cell will remain proprietary for three (3) years after shipment of first implantable grade unit. 7. Price per cell will be in accordance with standard pricing in effect at time of delivery. 8. In the event the Company requests the cell to continue exclusivity in perpetuity the following course of action will apply: o Upon shipment of the *th unit in the same model configuration, a letter stating intent of exclusivity in perpetuity will be sent to WGL and an additional payment of * will be required.
9. Any term or condition not covered above will be negotiated at the time of order. b. WGL expressly reserves the right to classify as non-standard, any technology incorporated in an SVO battery, beginning with WGL Model 96__. Prices for batteries incorporating said non-standard technology will be quoted on an individual basis.
C. Power Sources for Other Applications - Development charges will be quoted on an individual basis.
D. Additional terms for Development Charges
1. Should development work be terminated at any time during the contract period, WGL reserves the right to continue development of the cell and market this product as a standard shape. Development charges paid up to and including the point of termination will not be refunded.
2. Cells using any WGL electrochemical couple which require the development of a new assembly or manufacturing technology will be quoted on an individual basis. 3. WGL reserves the right to quote the lead time on a case by case basis. The actual project duration for a specific design will depend upon the complexity of the design and the workload at the time the order is placed.
PRICING FOR WGL POWER SOURCES OTHER THAN COVERED IN AGREEMENT
A. Pricing for alternate chemistry power sources will be set according to the WGL Price List in effect at the time of purchase. The pricing will be based on the volume of that specific alternate chemistry model. For pacemakers, the chemistry alternatives to lithium iodine include lithium thionyl chloride, lithium silver vanadium oxide, and lithium carbon monofluoride. For defibrillators, the available chemistry is lithium silver vanadium oxide. ATTACHMENT C INITIAL NON-HYBRID PRODUCT PURCHASE ORDERS (VALUE = $ * )
======QUANTITY DUE PRIOR TO P/N REV DESCRIPTION 12/31/98 VALUE ($) ======6041534-099 H SETSCREW * * ------5015435-001 B THUMBSCREW * * ------6041701-001 B WASHER * * ------6041702-001 C HELIX SHAFT * * ------6041700-002 U TIN ELECTRODE RING * * ------6041700-098 U ELECTRODE RING * * ------6041641-003 J ELECTRODE RING TIN * * ------6041641-004 J ELECTRODE RING TIN * * ------6041743-001 G DISTAL ELECTRODE TIP * * ------64-16-759 0 TIN TIP * * ------62-02-506 1 TIN TIP * * ------61-12-523 2 TIN RING * * ------7001630-001 H "L" CONNECTOR ASSEMBLY * * ------7001441-012 H "L" CONNECTOR MICRONY * * ------6010987-001 C TRILOGY CASE HALF * * ------6010987-002 C TRILOGY CASE HALF * * ------6011117-098 J AFFINITY CASE HALF * * ------6011117-099 J AFFINITY CASE HALF * * ------62-31-463 1 REGENCY CASE HALF * * ------62-31-471 0 REGENCY CASE HALF * * ------62-01-854 2 MICRONY CASE HALF * * ------62-02-847 2 MICRONY CASE HALF * * ------6041696-002 D SPACER * * ------6041504-099 J SET SCREW * * ------6041697-001 D RING * * ------
Page 1 ATTACHMENT C INITIAL NON-HYBRID PRODUCT PURCHASE ORDERS (VALUE = $ * )
======QUANTITY DUE PRIOR TO P/N REV DESCRIPTION 12/31/98 VALUE ($) ======6041703-001 B STOPPER * * ------6041783-097 G TIP COATED ELUT. * * ------6041555-001 G CONNECTOR PIN * * ------6041266-002 C PROXIMAL RING * * ------6041809-099 B CONNECTOR BLOCK * * ------
TOTAL
Connector block (6041499-098) currently being sourced by our current connector assembly sup [ILLEGIBLE] have the following quantity and dollar amount sourced through Wilson Great Batch, Ltd
======QUANTITY DUE PRIOR TO P/N REV DESCRIPTION 12/31/98 VALUE ($) ======6041499-098 J CONNECTOR BLOCK * * ------
GRAND TOTAL *
Page 2 EXHIBIT 10.23*
THE CONFIDENTIAL PORTIONS OF THIS EXHIBIT, WHICH HAVE BEEN REMOVED AND REPLACED WITH AN ASTERISK, HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A Agreement No. ______REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 406 [LOGO]
SUPPLIER PARTNERING AGREEMENT
This agreement ("Agreement") is effective as of June 1, 2000 by and between the following parties:
Pacesetter, Inc. (d/b/s St. Jude Medical CRMD), a St. Jude Medical Company, 15900 Valley View Court, Sylmar, California 91392-9221 ("Buyer"); and
Wilson Greatbatch Ltd., 10000 Wehrle Drive, Clarence, New York 14031
("Seller")
INTRODUCTION
The parties desire to establish a stable relationship based on a continuous improvement process leading toward world class benchmarks in quality, cost, inventory levels, delivery, technology, and service.
Therefore, Seller and Buyer mutually agree to the following:
1. TERM OF AGREEMENT. This Agreement begins on June 1, 2000 and will run until December 31, 2003 ("Initial Term"); provided, however, that the term of this Agreement may be extended pursuant to Section 9 of Exhibit A.
2. PURCHASE ORDERS; TERMS AND CONDITIONS OF SALE. Seller will provide Buyer products pursuant to purchase orders to be issued by Buyer's business units, including its Swedish affiliate. The general terms and conditions of sale for products sold by Seller to Buyer hereunder are set forth on Exhibit A attached to and made a part of this Agreement. The parties expressly agree that none of the terms and conditions of any standard purchase preprinted forms used by either Seller or the Buyer in effectuating the purchase and sale transactions contemplated by this Agreement (including, but not limited to, purchase orders, acknowledgements and acceptance forms, invoices, labels and shipping documents) which are inconsistent with, or in addition to, those contained in this Agreement shall have any force or effect.
3. PRICING. Pricing shall be as shown in Exhibit B, Attachment 1 (component parts) and Attachment 2 (batteries).
4. INVENTORY. Seller will maintain a finished inventory for each product at the level indicated in Exhibit B, Attachments 1 and 2. The level is a proportion of the estimated annual usage for the product and will be updated each quarter. If inventory drops below the indicated level at any time or is totally consumer by Buyer, Seller will promptly replenish inventory to the appropriate level as indicated in Exhibit B, Attachments 1 and 2. Seller will keep
1 Buyer informed of the inventory level and location of each product. At Buyer's discretion, any inventory may be consigned to Buyer's facility. Buyer will be responsible for any resulting additional costs to Seller (as set forth on Exhibit A).
5. QUANTITY. Subject to Section 2.6 on Exhibit A, Buyer will purchase no less than the inventory commitment of each product indicated in Exhibit B, Attachments 1 and 2. Buyer will purchase its annual requirement of batteries and **** (by aggregate value) of its requirement for Component parts from Seller. Excluded from this obligation is Buyer's need for new or developing technologies that Seller is unable to supply at competitive prices and in time to meet Buyer's needs.
6. QUALITY/IMPROVEMENTS. Seller will start of maintain a JIT (just in time) program that includes the ability to measure and report on quality control and improvement processes. The JIT will include at least:
- On time delivery,
- Cost reductions,
- Benchmarking,
- Lead time reduction to meet benchmarks,
- Statistical process controls (SPC) in critical process areas, and
- Inventory reduction.
6.1 Seller will start and/or maintain a continuous improvement strategy for product quality, cost, delivery, inventory reduction, and service.
6.2 Seller will have in place goals to improve performance for:
- QUALITY to reduce Buyer's rejections of products to less than ***** PPM by the end of the initial one-year term of this Agreement. Beginning in the second year of this Agreement, the goal will be less than ***** PPM. Beginning in the third year of this Agreement, the goal will be less than *** PPM. The benchmark performance will be no more than *** PPM line fallout rejections found during Seller's processing without Buyer's inspection being needed.
- DELIVERY to be 100% on time (up to three days early and zero days later).
6.3 Time is of the essence for purposes of this Agreement.
6.4 Seller will start and/or maintain a quality system or plan that meets the requirements of ISO-9000.
6.5 Upon request by Buyer or Seller, Seller will participate, or be permitted to participate, in early supplier involvement with Buyer for Buyer's new products of the typo specified in this Agreement. Buyer will provide Seller with sufficient information and cooperation in connection therewith to permit Seller to qualify product for sale to Buyer.
6.6 Seller will meet with Buyer on a regular basis to review programs, performance measurements, and barriers to progress. Seller and Buyer will mutually agree on taking actions to correct problems and eliminate barriers.
2 7. COMMUNICATION. Seller and Buyer will conduct quarterly reviews to facilitate the purposes of this Agreement. Also, Buyer will inform Seller of Buyer's planned production rates for the products to help Seller in its planning. Until further notice, the key people who will be responsible for routine communications between Seller and Buyer are:
For Seller: ****************************************** *********************************************** ***************************************
For Buyer: ***************************** *********************************************
8. BUYER'S DRAWINGS AND DESIGNS. Seller will use only drawings that have been mutually agreed upon to manufacture the products. Seller will never make or sell any products using Buyer's designs for anyone other than Buyer.
9. CONFIDENTIAL INFORMATION.
9.1 TREATMENT OF PROPRIETY INFORMATION. Each of WGL and Buyer (each a "receiving party") agrees to maintain all proprietary information disclosed by the other party to this Agreement (each a "disclosing party") in strict secrecy and confidence, and not to disclose such proprietary information to any third party, nor make any use of such information and technology for its own benefit or gain other than in carrying out its efforts under this Agreement. The receiving party agrees to have its employees sign agreements, or to have an appropriate corporate policy in effect, which requires them to keep confidential any proprietary information they learn in their positions at the receiving party; these agreements and/or policies shall require them to maintain confidentiality of proprietary information disclosed by the disclosing party. The receiving party further agrees that no proprietary information or materials will be supplied to any other corporation, partnership, laboratory, or individuals other than those approved in writing by the disclosing party, with the exception of disclosure to the FDA and similar regulatory agencies of information relative to obtaining regulatory approval.
9.2 LIMITED RELEASE. The receiving party shall be released from the obligations of Section 9.1 to the extent that any of the disclosed information: (a) was already part of the public domain at the time of the disclosure by the disclosing party; (b) becomes part of the public domain through no fault of the receiving party (but only after and only to the extent that it is published or otherwise becomes part of the public domain); (c) was in the receiving party's possession prior to the disclosure by the disclosing party and was not acquired, directly, or indirectly, from the disclosing party or from a third party who was under a continuing obligation of confidence to the disclosing party; (d) is received (after the disclosure by the disclosing party) by the receiving party from a third party who did not require the receiving party to hold it in confidence and did not acquire it directly or indirectly from the disclosing party under a continuing obligation
3 of confidence; or (e) is disclosed by the receiving party pursuant to judicial compulsion, provided that the disclosing party is notified at the time such judicial action is initiated. In addition, notwithstanding Section 9.1, Seller may provide proprietary information of Buyer to its subcontractors and vendors without Buyer's prior approval provided that WGL first requires may such subcontractor or vendor to sign a confidentiality agreement which requires them to keep confidential such Buyer information and not to use it except for the purpose of performing their obligations to Seller.
9.3 TERM OF OBLIGATION. The obligation of the receiving party to receive and hold information disclosed by the disclosing party in confidence, as required by this Section 9, shall terminate eight (8) years from the date of disclosure of the information hereunder and shall survive any earlier termination of this Agreement.
9.4 DISPOSAL UPON TERMINATION. In the event this Agreement is terminated, any samples, sketches, or other proprietary material provided by the disclosing party to the receiving party shall be destroyed or returned to the disclosing party, unless and to the extent such materials are necessary to the receiving party to provide continuing support.
10. OTHER PROVISIONS.
10.1 RELATIONSHIP OF THE PARTIES. There is no principal-agent relationship between the parties. Neither party will have any authority to contract, bind, or act on behalf of the other, and neither party will try to do so.
10.2 SEPARABILITY AND WAIVER. If any part of this Agreement is not legally enforceable, only that part will be disregarded and the rest will stay in effect. If a party waives a particular term or condition, it will be for one time only, it will not change the Agreement, and the same term or condition can be enforced again later.
10.3 ENDRE AGREEMENT; CHANGES. This Agreement contains the entire understanding of the parties regarding this subject and replaces all previous agreements. There are no written or oral agreements, understandings, or representations apart from this Agreement. This Agreement cannot be changed in any way except by a written document that both parties sign. No interference will be drawn from any difference between this Agreement and any prior negotiations, letters of intent, or drafts of this Agreement.
10.4 NOTICES. Notices under this Agreement must be in writing. A party can send notice by U.S. certified or express mail, by express courier service (e.g., Federal Express), or by telephone fax to the other party, addressed as follows:
To Buyer at:
Dan Starks
4 President & CEO St. Jude Medical Cardiac Rhythm Management Division 15900 Valley View Court Sylmar, California 91392-9221
To Seller at:
Edward F. Voboril
President & CEO Wilson Greatbatch Ltd.
10000 Wehrle Drive Clarence, NY 14031 or to whatever other address a receiving party may specify from time to time. The parties will consider that notice is given at the end of two business days after it is faxed, and/or five business days from the date it is deposited postage prepaid in the mail or given to an express courier service. A written receipt will be proof of delivery if it is signed by an authorized representative of the receiving party at the address above.
10.5 EFFECT OF TERMINATION. Expiration or termination of this Agreement shall not affect or cause the release of monetary obligation which shall have accrued prior to such termination, and the parties obligations under Sections 9 and 10 and Sections 3 and 6 of Exhibit A shall continue in effect until fully satisfied.
10.6 PUBLIC ANNOUNCEMENTS. Notwithstanding anything to the contrary contained in this Agreement, neither party may initiate or make any public announcement or other disclosure concerning the terms and conditions or the subject matter of this Agreement to any third party without the prior written approval of the other party except as may be required by law. In those circumstances where either party believes that any such disclosure is required by law, it shall (a) notify the other party on a timely basis in advance and (b) use its best efforts to seek confidential treatment of the material provisions of this Agreement to the greatest extent permitted by law.
10.7 LAW. California law will govern this Agreement and its interpretation, as well as the rights and duties of the parties.
IN WITNESS OF THIS AGREEMENT, the parties have signed below by their authorized officers:
5 PACESETTER, INC. WILSON GREATBATCH, LTD.
By: /s/ James Reynolds By: /s/ Edward F. Voboril ------James Reynolds Edward F. Voboril
Title: Vice President, Materials Title: President and CEO ------
Date: 5-24-2000 Date: 5-24-2000 ------
6 EXHIBIT A TO SUPPLIER PARTNERING AGREEMENT
This Exhibit A sets forth the general terms and conditions of sale for all products sold by Seller to Buyer pursuant to the Agreement to which it is attached.
1. DEFINITIONS. For purposes hereof, the following terms shall have the defined meanings set forth below:
1.1 "AGREEMENT" means the Supplier Partnering Agreement to which this "Exhibit A" is attached.
1.2 "BATTERIES" means all batteries and other power sources sold by Seller under this Agreement.
1.3 "COMPONENTS" means all other products sold by Seller to Buyer under this Agreement.
1.4 "CONSIGNMENT PRODUCTS" means all Batteries and Components consigned by Seller under this Agreement.
2. ORDER, DELIVERY, PAYMENT, INSPECTION.
2.1 ORDERS. All products shall be ordered by Buyer using Buyer's standard purchase order form which shall set forth, at a minimum, the quantity of products ordered, the address of the facility of Buyer (or its affiliate) to which product should be shipped and requested delivery dates.
2.2 PAYMENT TERMS. Payment terms are as follows: (a) for Consignment Products purchased by Buyer, by the thirtieth (30th) day after the day on which Consignment Products shall have been withdrawn by Buyer or (b) for all other Batteries and Components purchased by Buyer, net 30 days from the date of the invoice, F.O.B. Clarence, NY or point of shipment, whichever is applicable. Payment terms for tooling and engineering charges are net 30 days from the date of the invoice.
2.3 DELIVERY. Except for any Consignment Products, Seller shall deliver Products to Buyer's facility at Valley View Court in Sylmar, California, and/or to such other location(s) as Buyer may designate. Unless Buyer gives Seller written instructions as to the method of shipment and carrier, Seller shall select the methods of shipment and the carrier for the respective purchase order. Seller shall prepay transportation and similar charges upon shipment. Except for Consignment Products, title to all Products conforming to Buyer's purchase order shall pass, free and clear of all encumbrances, at the FOB shipping point, which shall be Seller's facility. Buyer
7 assumes and agrees to bear all risk of damage or loss to the goods after delivery by Seller to the carrier at the FOB shipping point. Buyer hereby releases Seller from any and all claims and liability with respect to any such in-transit damages or losses to the goods. Buyer shall be responsible for securing insurance coverage to cover shipments and deliveries hereunder.
2.4 INSPECTION. Seller shall perform testing to ensure that Products delivered by Buyer meet all applicable specifications. Buyer inspection of incoming Products will rely upon Seller testing and may consist of an examination of Seller's testing documentation as well as independent testing by Buyer. Notwithstanding the foregoing, Buyer shall attempt to inspect all products (including the Consignment Products) within thirty (30) days, but not to exceed sixty (60) days, and notify Seller if any of the products fail to meet Buyer's specifications and quality standards for such products.
2.5 ACCEPTANCE. Buyer may reject any shipments or deliveries of products which are short, nonconforming, defective or deficient and may request correction and/or replacement. Rejected shipments or deliveries of products shall at the request of Seller be set aside for Seller inspection, or at the request of Seller shipped freight prepaid to Seller. All products returned to Seller shall be accompanied by a copy of their original shipping documents and the name and phone number of the person at Buyer to be contacted regarding such return. Promptly upon receipt of notice of such shortage, non-conformance, defect or deficiency, Seller shall immediately notify Buyer:
(a) as to how Seller will replace the defective or deficient products upon return to Seller, ship replacement products, or otherwise promptly correct such shortage, non-conformance, or deficiency; and/or
(b) whether such shipment of products shall be set aside and held by Buyer or returned to Seller and the address to which such affected products should be returned, or whether such products should otherwise be disposed of.
If Buyer elects to cancel or rescind such purchase, Seller shall promptly refund and reimburse Buyer the price paid by Buyer for such purchase, including freight and shipping costs incurred by Buyer in such purchase, prior to the return of the same to Seller. If Buyer elects to have the product replaced, Seller shall bear or shall reimburse Buyer for all costs and expenses incurred by Buyer to repackage, ship and return affected products to Seller and shall issue a credit memo for the amount of the purchase price of the returned products.
2.6 FORCE MAJEURE. In the event of fire, explosion, strikes, war, act of any governmental agency, material or labor shortage, transportation contingency, act of God or any other causes beyond the control of Seller ("Force Majeure"), Seller shall not be liable for any delay in shipment or non-delivery of Batteries or Components covered by this Agreement arising from Force Majeure, and Buyer shall be bound to accept the delayed shipment or delivery made within a reasonable time. In the event of Force Majeure, Buyer shall be excused for the failure to take and pay for Batteries or Components ordered under this
8 Agreement, until such Force Majeure condition is removed. In the event such conditions cannot be corrected by the party affected within six (6) months of the occurrence of a Force Majeure event, then the other party shall have the option to terminate this Agreement upon one (1) month prior notice.
3. WARRANTY. LIMITATION OF LIABILITY.
3.1 Battery Warranty. Seller warrants that the Batteries delivered to Buyer will be free from defects in materials and workmanship at the time of sale. Seller's sole obligation under this warranty is the replacement of any Battery which is defective without charge. SELLER MAKES NO OTHER WARRANTY WITH RESPECT TO THE BATTERIES, WRITTEN OR ORAL, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. BUYER EXPRESSLY ASSUMES ALL LIABILITY ARISING FROM OR IN CONNECTION WITH THE USE OF THE BATTERIES PURCHASED HEREUNDER, WHETHER BASED ON CONTRACT, WARRANTY, TORT OR OTHERWISE AND AGREES TO HOLD SELLER HARMLESS FROM SUCH CLAIMS.
3.2 COMPONENT WARRANTY.
(a) Seller warrants that each of the Components delivered to Buyer will meet all applicable specifications and will be free from defects in materials and workmanship at the time of sale. Seller's sole obligation under this Warranty is the repair or replacement, at its election, of any Component which is found, upon Seller's inspection not to meet such warranty. Such product will be repaired or replaced without charge provided that, (1) prior written approval is required before returning any product, and (2) any product return sent to Seller without prior written approval will be returned to the sender, freight collect.
(b) This Warranty does not apply to depletion, wear and/or any failure occurring as a result of any of the following: normal use, abuse, misuse, any alteration or modification made to any Component without the express written consent of Seller, attempted disassembly, neglect, improper installation, of any other use inconsistent with any applicable law, rule, regulation or governmental directive, or any use inconsistent with the specifications or warning or recommended operating practices specific to the Component.
(c) THE WARRANTY SET FORTH IN THIS SECTION 3.2 IS IN LIEU OF ALL OTHER WARRANTIES (EXCEPT OF TITLE), EXPRESSED, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
3.3 LIMITATION OF LIABILITY. THE REMEDIES OF BUYER IN THE WARRANTY SET FORTH IN SECTION 3.1 WITH RESPECT TO BATTERIES AND IN THE WARRANTY SET FORTH IN SECTION 3.2 WITH RESPECT TO COMPONENTS ARE EXCLUSIVE, AND THE TOTAL LIABILITY OF SELLER WITH RESPECT TO ANY BATTERY OR ANY COMPONENT SOLD TO BUYER UNDER THIS
9 AGREEMENT, OR FROM DELIVERY, INSTALLATION OR REPAIR COVERED BY OR FURNISHED UNDER ANY SALE TO BUYER, WHETHER BASED ON CONTRACT, WARRANTY, NEGLIGENCE, INDEMNITY, STRICT LIABILITY, OR OTHERWISE, SHALL NOT EXCEED THE PURCHASE PRICE OF THE PRODUCT UPON WHICH SUCH LIABILITY IS PLACED. SELLER SHALL IN NO EVENT BE LIABLE TO BUYER OR TO ANY SUCCESSOR IN INTEREST OR ANY BENEFICIARY OR ASSIGNEE THEREOF RELATING TO THE SALE OF ANY BATTERY OR ANY COMPONENT FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF SUCH SALE OR ANY DEFECTS IN, OR FAILURE OF, OR MALFUNCTION OF THE PRODUCT UNDER SUCH SALE, INCLUDING BUT NOT LIMITED TO, DAMAGES BASED UPON LOSS OF USE, LOST PROFITS OR REVENUE, INTEREST, LOST GOODWILL, INCREASED EXPENSES AND/OR CLAIMS OF CUSTOMERS OF BUYER, WHETHER OR NOT SUCH LOSS OR DAMAGE IS BASED ON CONTRACT, WARRANTY, NEGLIGENCE, INDEMNITY, STRICT LIABILITY OR OTHERWISE.
4. COMPLIANCE WITH LAW.
4.1 VIOLATION OF LAW. Buyer and Seller shall each strictly observe and comply with all federal and local laws and regulations which may govern the manufacture, sale, handling and disposal of any products herein specified. Violation of any such law or regulation may be viewed as a breach of the Agreement, and may be cause for termination or suspension of sales thereunder. Nothing herein shall be construed to allow either party the right to cancel this Agreement for any inadvertent error or minor violation of any law or regulation by the other party.
4.2 GOOD MANUFACTURING PRACTICES. Products shall be manufactured and tested by Seller in accordance with all applicable U.S. laws and United States Food and Drug Administration (FDA) regulations, including but not limited to the FDA's current Good Manufacturing Practice regulations in effect at the time of such manufacture or testing. Seller shall notify Buyer of any FDA inspection of its production facilities used to manufacture any products and shall furnish Buyer with copies of any Form 483 report and Establishment. Inspection Reports to the extent that they apply to any product.
4.3 FDA COMPLIANCE. During the term of this Agreement Buyer shall have responsibility for obtaining at its expense, in its name and at its discretion any necessary device regulatory approvals from the U.S. Food and Drug Administration (i.e. PMA's or 501 (k)'s as the case may be), and applicable regulatory agencies of such other countries in which product incorporating the Batteries or Components will be sold. Seller shall supply Buyer will all documents, instruments, information, reports and advice and general assistance as is necessary to complete, and as is reasonable requested by Buyer in connection with such regulatory approval efforts.
4.4 SELLER COMPLIANCE. Upon not less than three (3) business days' notice, Seller will provide such Buyer personnel as Buyer reasonably deems appropriate with reasonable
10 access from time to time to Seller's facilities and records for the purpose of confirming Seller's compliance with requirement as noted in this Section 4, and for the further purpose of confirming, if reasonably deemed necessary by Buyer, Seller's compliance with applicable specification for Batteries and Components.
5. CONSIGNMENT. If Buyer requests Seller to consign any products to Buyer, the following terms and conditions shall apply:
(a) Consignment Products shall be delivered to Buyer locations at which Buyer will use the products, based upon information supplied by Buyer to Seller. However, Seller shall have the option not to make any such shipment unless Buyer shall have paid all sums owing with respect to all previous quantities of products purchased by Buyer.
(b) Seller shall use Federal Express or UPS or other recognized courier services to ship Consignment Products, as directed by Buyer, and shall charge Buyer's account with such courier service. Consignment Products shall be received by Buyer and stored by Buyer as Seller's property. All charges and expenses for receiving, handling, and storing such material shall be paid by Buyer. The Consignment Products in all cases shall be carefully segregated from other goods either of the same or different character belonging either to Buyer or to any third person, shall be marked as Seller's property, and shall be stored in an area in Buyer's facilities separate from and not mingled with other goods of Buyer or of any third person.
(c) Buyer shall inspect all Products (including the Consignment Products) and notify Seller within one month if any of the Products fail to meet Buyer's specifications and quality standards for such Products.
(d) Buyer shall comply with all laws which might in any way affect Seller's ownership of the Consignment Products from time to time stored in Buyer's facility(s) and shall indemnify and hold harmless Seller from and against all loss, damage, and expense arising out of any levy, attachment, lien or process involving the Consignment Products. Buyer shall be responsible for, and shall indemnify Seller against, any loss or shrinkage in the quantity of the Consignment Products while so stored, whether such loss or shrinkage is caused by theft or pilferage or by fire, flood, tornado or other similar catastrophe. Buyer shall purchase and maintain insurance covering all such losses and naming Seller as additional insured.
(e) Buyer shall keep at all times a complete list or inventory of the Consignment Products so stored, copies of which list shall be furnished to Seller upon request. Upon not less than three (3) business days prior notice, Seller's representatives shall have reasonable access to the Consignment Products at Buyer's facilities for the purpose of verifying such lists or inspecting the condition of Consignment Products.
(f) All public charges, whether in the nature of sales, occupational or other taxes or assessment or license fee, which shall be levied or assessed against the Consignment Products
11 at Buyer's facilities, or against Buyer or Seller by reason hereof, by any federal, state or municipal authority, shall be paid by Buyer.
(g) All Consignment Products shall remain the property of Seller and shall be held by Buyer as such until withdrawn from the consigned stock and purchased by Buyer pursuant to this Agreement. Buyer will withdraw products from the inventory of Consignment Products on a first-in- first-out basis for each product model.
(h) From time to time, as Buyer shall purchase Consignment Products from Seller, it may withdraw the Consignment Products so purchased from Seller's consigned stock of the products at Buyer's facility(s). Upon each such withdrawal for purchase by Buyer pursuant to this Agreement, title to the Consignment Products so withdrawn shall pass to Buyer.
6. OBLIGATIONS UPON TERMINATION.
(a) Upon expiration of this Agreement for any reason whatsoever or if Buyer changes the model mix of, or discontinues, any Batteries or Components which it requires, Buyer shall purchase, or be deemed to have purchased from Seller, all of the remaining Consignment Products located at a Company facility, which met Buyer's specifications and quality standards at the time of receipt, as of the date of expiration or termination, at the prices in effect at such time. Payment shall be made in accordance with Section 2.2.
(b) Upon expiration or termination of this Agreement for any reason whatsoever or if Buyer changes the model mix of, or discontinues, any Batteries or Components which it requires, Buyer agrees to purchase, within six (6) months, all Batteries and Components that Seller then holds either (i) as finished inventory or (ii) work-in-progress ("WIP") up to the maximum amount of inventory that Seller is required to maintain under Section 4 of the Agreement (provided, however that, for any WIP, Buyer shall only be required to reimburse Seller for the cost of any such material that Seller cannot reasonably use for other products).
7. NEW TECHNOLOGY.
7.1 During the Initial Term of this Agreement and any extension thereof, Seller agrees, subject to Section 7.2 and 7.3 below, to offer, develop and manufacture for, and to sell to, Buyer new Batteries and Components for Buyer's products incorporating any technology or intellectual property (collectively, "Technology") for such Batteries and Components which Seller now possesses or may hereafter develop or acquire, provided that Seller is not otherwise restricted by law or contract (due to intellectual property rights owned by third parties or designs the development of which were paid for in whole or in part by a customer) from selling products incorporating such Technology to Buyer ("New Products"). All New Products shall be subject to and covered by this Agreement (subject to Sections 7.2 and 7.3).
7.2 With respect to any new Battery for a defibrillator product of Buyer (each, a "New Defibrillator Battery"), the parties agree that the pricing for any such New Defibrillator Battery shall be set by Seller as follows:
12 7.2.1 for non-SVO technology, Seller's pricing to Buyer for such a New Defibrillator Battery will not exceed ****, which price will be reduced by **** ******* ************ in which Seller shall have delivered such a New Defibrillator Battery.
7.2.2 for SVO technology, Seller's pricing to Buyer for such a New Defibrillator Battery will not exceed ****, which price will be reduced by ********* *********** in which Seller shall have delivered such a New Defibrillator Battery.
7.3 For any new Product developed under this Section 7 for Buyer other than a New Defibrillator Battery, the parties agree to negotiate pricing for such New Product in good faith.
8. CONTINUITY OF SUPPLY. Seller acknowledges that Buyer has certain concerns regarding the continuity of its supply source for Batteries and Components in the event that a change of control occurs with respect to Seller. In that regard, Seller agrees as follows:
8.1 This agreement is binding on Seller's successor and assigns.
8.2 In the event that Seller sells all or substantially all of its assets to any third party, Seller shall require any such purchaser to assume and agree to perform all of Seller's obligations under and for the term of this Agreement.
8.3 In addition, Seller agrees that, in connection with any sale of a controlling interest of Seller to any direct competitor of Buyer ("Acquiror"). Seller will notify any such potential Acquiror of its obligations under this Agreement.
8.4 "Controlling interest" means:
8.4.1 The acquisition by a competitor of Buyer of twenty-five percent (25%) or more of any class of securities of Seller;
8.4.2 The acquisition by a competitor of Buyer of a right (whether by means of warrants, options, or otherwise) to acquire twenty-five percent (25%) or more of any class of securities of Seller;
8.4.3 The granting of a right to representation of the Seller's board of directors to a competitor of Buyer (or a director, officer, employee, or agent of a competitor of Buyer) or the election to Seller's board of directors by a competitor of Buyer (or director, officer, employee or agent of a competitor of Buyer); or
8.4.4 The establishment by the Seller of a joint venture in which a competitor of Buyer owns ten percent (10%) or more of any class of securities or has a right to ten percent (10%) or more of the profits of the venture.
13 9. OPTION TO EXTEND THE AGREEMENT. Buyer shall have the option to extend the terms of this Agreement beyond the Initial Term for a period of two (2) years ("Option Extension Period") by delivering written notice to Seller not less than sixty (60) days prior to the extension date. The Option Extension Period, however, is subject to all of the following conditions:
9.1 ***************************************************************** ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************
9.2 ***************************************************************** ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************
9.3 ***************************************************************** ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************
9.4 ***************************************************************** ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************ ************************************************************************
9.5 Seller and Buyer will cooperate and negotiate in good faith in connection with allocating the aggregate price increases permitted by Buyer under Section 9.1(b) among individual Batteries and Components to be purchased by Buyer during the Option Extension Period.
14 EXHIBIT B
PRICING AND INVENTORY LEVEL
The firm, fixed prices for Components are set forth on Attachment 1 to this Exhibit B and for Batteries are set forth on Attachment 2.
******************************************************************************* ******************************************************************************* *******************************************************************************
15 EXHIBIT B - ATTACHMENT 1 WILSON GREATBATCH & GREATBATCH HITTMAN COMPONENT PARTS
------UNIT PRICE 6/1/00 THRU % INVENTORY P/N DESCRIPTION 12 MO EAU 12/30/01 REQUIREMENT ------6041534-099 *********** ******* $ ******* 25% ------5015435-001 ***************** ******* $ ******* 25% ------6041701-001 ******************* ******* $ ******* 25% ------6041702-001 **************** ******* $ ******* 25% ------6041700-002 ****************** ******* $ ******* 25% ------6041641-003 ******************** ******* $ ******* 25% ------6041641-004 *********************** ******* $ ******* 25% ------7001630-001 ********************* ******* $ ******* 25% ------7001441-012 ****************** ******* $ ******* 25% ------6041696-002 ******** ******* $ ******* 25% ------6041504-099 ********** ******* $ ******* 25% ------6041697-001 ***** ******* $ ******* 25% ------6041556-001 ************** ******* $ ******* 25% ------6041266-002 ************ ******* $ ******* 25% ------3000909 ******************* ******* $ ******* 25% ------3000881 ********************* ******* $ ******* 25% ------3000885 ******** ******* $ ******* 25% ------3000899 **************** ******* $ ******* 25% ------3000622 ************** ******* $ ******* 25% ------3000884 ************ ******* $ ******* 25% ------3000621 ************** ******* $ ******* 25% ------8001512 ***************** ******* $ ******* 25% ------3001242 ********* ******* $ ******* 25% ------3001193 ********** ******* $ ******* 25% ------8000831 ************ ******* $ ******* 25% ------8008873 **************** ******* $ ******* 25% ------8008556 ********************* ******* $ ******* 25% ------
1 EXHIBIT B - ATTACHMENT 2 WILSON GREATBATCH & GREATBATCH HITTMAN BATTERIES
------PART NUMBER DESCRIPTION 12 MO EAU UNIT PRICE 6/1/00 THRU % INVENTORY 12/30/01 REQUIREMENT ------PACER BATTERIES ------1120009-001 ******** ****** $ ****** 0 ------1120036-001 ******** ****** $ ****** 0 ------1120043-001 ******** ****** $ ****** 0 ------1120065-001 ******** ****** $ ****** 0 ------1120052-001 ******** ****** $ ****** 25 ------1120052-001 **************** ****** $ ****** 25 ------TBD **************** ****** $ ****** 0 ------1120055-001 ************** ****** $ ****** 10% (4 WKS. CONSIGNMENT STOCK AT VEDDESTA) ------1120056-001 ************** ****** $ ****** 10% (4 WKS. CONSIGNMENT STOCK AT VEDDESTA) ------ICD BATTERIES ------3001015 ************** ****** $ ****** 25 ------8001556 ************** ****** $ ****** 0 ------8006260 ************** ****** $ ****** 25 ------1120503-001 ************** ****** $ ****** 0 ------TBD ************ ****** $ ****** 0 ------10003678 ********* ****** $ ****** 0 ------CFX BATTERIES ------TBD ********** $ ****** 0 ------
1 EXHIBIT B - ATTACHMENT 1 WILSON GREATBATCH & GREATBATCH HITTMAN COMPONENT PARTS
------UNIT PRICE 6/1/00 THRU % INVENTORY P/N DESCRIPTION 12 MO EAU 12/30/01 REQUIREMENT ------8008555 ******************** ******* $ ******* 25% ------8008554 ********************** ******* $ ******* 25% ------3001236 ********* ******* $ ******* 25% ------7001630-003 ******************* ******* $ ******* 25% ------1080357-002 ********** ******* $ ******* 0% ------8001713 ********* ******* $ ******* 0% ------1080376-001 ****************** ******* $ ******* 0% ------1080438-001 ********************** ******* $ ******* 8% ------TBD ******************** ******* $ ******* 25% ------63-27-659 ***************** ******* $ ******* 10% ------63-27-634 ******************* ******* $ ******* 10% ------6041783-097 **************** ******* $ ******* 25% ------6041706-002 ************** ******* $ ******* 25% ------64-16-759 ********** ******* $ ******* 0 ------62-02-506 ************ ******* $ ******* 0 ------60-83-997 ********************* ******* $ ******* 10% ------64-16-825 ********************* ******* $ ******* 10% ------61-12-523 ************ ******* $ ******* 10% ------
Note: Revision level determined by individual Purchase Orders
The "Inventory Requirement" can be processed to completion and shipped within 5 calendar days.
Seller inventories will be replenished within a period of 40 calendar days.
Seller's obligation to maintain inventory is limited to the level reflected in "Inventory Requirement" column.
2 Note: Revision level determined by individual Purchase Orders The "Inventory Requirement" can be processed to completion and shipped with 5 calendar days. Seller inventories will be replenished within a period of 40 calendar days. Seller's obligation to maintain inventory is limited to the level reflected in the "Inventory Requirement" column.
'CFX pricing - Stainless steel case:
Quantity Unit Price
********* ******** ********* ******** ********* ******** ********* ******** ********* ********
If annual requirements for a particular "Pacer Batter" falls below **** units the firm fixed price for that battery will become ******** ****** Battery is a reduced size version of the ****** Battery.
2 Exhibit 10.24
LICENSE AGREEMENT
Between the party
MEDTRONIC, INC., a Minnesota Corporation with its principal offices in Minneapolis, Minnesota, U.S.A., hereinafter together referred to with its Subsidiaries as "MEDTRONIC",
And the party
WILSON GREATBATCH LTD., a New York corporation with its principal offices in Clarence, New York, U.S.A., hereinafter together referred to with its Subsidiaries as "GREATBATCH",
Dated this ______day of March, 1976 PREAMBLE
WHEREAS, GREATBATCH has licensing rights to certain Subject Patents, included in APPENDIX A to this Agreement and hereafter defined, relating to lithium iodide, or other halide, power sources and methods or apparatus of the manufacture thereof.
WHEREAS, MEDTRONIC wishes to acquire a non-exclusive, worldwide license under all of said Subject Patents to manufacture, have manufactured, use and sell, offer for sale or otherwise make available such lithium iodide, or other halide, power sources;
WHEREAS, GREATBATCH is willing to grant such a license to MEDTRONIC on the terms and conditions expressed herein.
NOW, THEREFORE, in consideration of the promises the agreements, covenants and conditions herein contained, the parties hereto covenant and agree with each other as follows:
ARTICLE I
DEFINITION OF TERMS
For the purpose of this Agreement the following terms shall mean:
A. "Licensed Products" - means all power sources and any raw materials, parts and components thereof and any methods or apparatus for the manufacture thereof coming within the protection of claims of the Subject Patents in the country of manufacture, use and/or sale by MEDTRONIC. "Licensed products - Iodide" means any Licensed Product incorporating as a raw material or component, iodine or an iodine compound. "Licensed Products - Halide" means any Licensed Product incorporating as a raw material or component, a halogen other than and/or addition to iodine or and iodine compound.
B. "Subject Patents" - means the patents listed in APPENDIX A; any divisions, continuations, re-issues thereof, or substitutes therefor based upon or corresponding to the listed patents; any foreign patents corresponding thereto; and, at the option of MEDTRONIC, any other U.S. patents and corresponding foreign patents which may be granted for lithium iodide, or other halide, power sources and methods or apparatus for the manufacture thereof and which GREATBATCH has the right to include within this License Agreement while the same is in effect.
C. "Sold" - means billed out or delivered or the receipt of full paument, whichever occurs first.
D. "Subsidiary" - means a corporation, company or any other entity at least fifty percent (50%) or more of whose outstanding voting stock is owned or controlled at any time during the course of this Agreement, directly or indirectly, by a party to this Agreement, but such corporation, company, or other entity shall be deemed a Subsidiary only so long as such ownership or control exists.
ARTICLE II
WARRANTIES AND REPRESENTATIONS
A. GREATBATCH represents and warrants that it is the sole owner of the entire right, title and interest in and to of the Subject Patents listed on Appendix A.
B. GREATBATCH represents and warrants that it has the right to enter into this Agreement, and that there are no outstanding assignments, claims, licenses, mortgages, agreements or understandings, express or implied, which directly reduce the value to MEDTRONIC of the non- exclusive licenses and rights herein granted or intended to be granted by GREATBATCH to MEDTRONIC. It is expressly recognized that GREATBATCH has the unrestricted right to license others under the Subject Patents.
ARTICLE III
RIGHTS GRANTED
GREATBATCH hereby grants and agrees to grant to MEDTRONIC a nonexclusive, worldwide license to manufacture, have manufactured, use and sell, offer for sale or otherwise make available Licensed Products and to practice methods under the Subject Patents, for the full life of enforcement thereof, including the right to pass along licenses under the Subject Patents for use of such Licensed Products by third parties purchasing the same from MEDTRONIC. ARTICLE IV
CONSIDERATION
A. Until the expiration of the last to expire of the Subject Patents, MEDTRONIC shall pay to GREATBATCH, as consideration for the rights and licenses granted herein, the following unit royalty on all Licensed Products Sold as a Power Source to third parties, or made by or for MEDTRONIC'S Power Source manufacturing division or Subsidiary, and accepted by, MEDTRONIC for incorporation with a medical or other device:
1. Four Dollars ($4.00) for each Licensed Product-Iodide Sold or accepted for incorporation; and
2. Ten Dollars ($10.00) for each Licensed Product-Halide Sold or accepted for incorporation.
B. The unit royalty of four and ten dollars under part A. 1. and 2. of this ARTICLE IV shall be effective as of May 1, 1976 for the Medtronic fiscal year ending April 30, 1977. On the first day of May for each year thereafter that this License Agreement remains in effect, the unit royalty then prevailing for that Medtronic fiscal year shall be adjusted by a percentage equivalent to the percentage change in the United States Department of Commerce cost of living index from that index prevailing on May 1, 1976, the base year for purposes of calculation.
C. Only one royalty payment shall accrue hereunder on each Licensed Product even though such Licensed Product is manufactured in accordance with or incorporates inventions covered by more than one Subject Patent.
D. The aforesaid unit royalty, subject to modification as hereafter provided is being adopted as a matter of mutual convenience, regardless of which one(s) of the Subject Patents may be involved, and is freely accepted by the parties hereto as a reasonable royalty for the respective Licensed Products, and for the privilege provided MEDTRONIC to operate under any or all of the Subject Patents.
E. These royalties shall be consideration attributable only to the Subject Patents and shall be due and payable only so long as and to the extent that the manufacture, use or sale of Licensed Products would infringe one or more subsisting claims in any one or more issued patents in the country of issue included in the Subject Patents, which claims have not been abandoned, cancelled, disclaimed, expired, or awarded to another in an interference proceeding or declared invalid or otherwise unenforceable by a court of competent jurisdiction in a final judgment, for which no right of appeal lies, if such Licensed Products had been made, used or sold without authority or the owner of such patent.
F. If GREATBATCH hereafter grants any license to another under any one or more of the Subject Patents with a royalty base or rate more favorable than those granted under this license to MEDTRONIC, then from the effective date of such more favorable license, GREATBATCH agrees that MEDTRONIC shall be entitled to the benefit of any such more favorable base or rate.
G. Should MEDTRONIC be obligated, because of a dominating patent which necessarily would be infringed by MEDTRONIC'S exercise of the rights and licenses granted herein, to pay any patent license fee or royalty to a third party on sales of Licensed Products halide, then the adjusted unit royalty payable under Part A.2. of this ARTICLE IV shall thereafter be reduced in amount by the fee or royalty paid to such third party; however, such reduction shall in no event cause the unit royalty to fall below the amount of six dollars ($6.00), adjusted annually with changes in the cost of living index in the manner specified under paragraph B of this ARTICLE IV. In the event that a one-time payment or installment payments are made to such a third party for a fully-paid-up license, then the adjusted unit royalty payable under the said Part A.2. shall be reduced to the then prevailing adjusted unity royalty payable under this paragraph G only until such third party payment is fully credited. ARTICLE V
REPORTS, PAYMENTS AND ROYALTY VERIFICATION
A. Reports and Payments - MEDTRONIC agrees to make written summary reports to GREATBATCH within thirty (30) days after the first days of November and May of each year during the term of this Agreement after the Effective Date. Such reports shall state the description and number of Licensed Products Sold to others or accepted for use by MEDTRONIC in medical or other devices in any country under the licenses herein granted, and a calculation of the net royalty due GREATBATCH for same during the preceding six (6) calendar months before the date the particular report is due. Simultaneously, with the making of such report, MEDTRONIC agrees to pay to the order of GREATBATCH the royalties then due.
B. Royalty Verification - MEDTRONIC agrees to keep true and accurate written records showing the description and number of Licensed Products Sold to others or accepted for use by MEDTRONIC in medical or other devices in any country, said records to be in sufficient detail to enable the royalties payable hereunder by MEDTRONIC'S place of business and at usual business hours to an audit by or in behalf of GREATBATCH to the extent necessary to verify the reports hereinafter provided. Such audit shall occur no more frequently than once during any calendar year, and it shall be made at the expense of GREATBATCH by a Licensed Public Accountant or Certified Public Accountant appointed by GREATBATCH. Said accountant shall be licensed by either New York or Minnesota. No such examination shall cover a period longer than two (2) years preceding the start of such examination nor shall it cover any records or periods previously examined and no claim may be asserted unless made within ninety (90) days following an examination made pursuant to this paragraph. C. During the pendency of a proceeding or litigation before a court or administrative board in any country having competent jurisdiction over the subject matter contesting the scope, validity or infringement of certain or all claims or any Subject Patent, MEDTRONIC shall have the right to make all payments due under this Agreement pertaining directly and solely to such contested patent claims into an escrow account at the Northwestern National Bank in Minneapolis, Minnesota, pending the final, unappealed or unappealable decision in the litigation or proceeding. When a final decision from which no right of appeal lies is rendered the sums in the escrow account will be disbursed to GREATBATCH if the patent claims are held valid or infringed to the Licensed Products, the latter holding excusing MEDTRONIC if the patent claims are held invalid or noninfringed by the Licensed Products, the latter holding excusing MEDTRONIC from any further obligation under ARTICLE IV with respect to the patent claims litigated.
ARTICLE VI
DURATION
A. This Agreement shall continue to the full end of the term of the first Subject Patent to expire and may be extended by MEDTRONIC to the full end of the terms of any or all of the Subject Patents, unless sooner terminated in accordance with the provisions hereof, but all payments to be rendered to GREATBATCH under the Agreement shall be calculated in accordance with the right exercised under this License Agreement on a country-by-country basis with respect to unexpired patents following the successive expirations of the Subject Patents in each country.
B. Upon termination of this Agreement for any reason, MEDTRONIC shall have the right to complete and dispose of those Licensed Products which MEDTRONIC is obligated to deliver under any then existing contract, including any contract which may result from formal bids submitted to a prospective customer previous to such termination date where acceptance of such bids by such prospective customer would result in a formal contractual obligation. MEDTRONIC shall also have the right to complete and dispose of any Licensed Product which is in the process of manufacture and to dispose of any Licensed Product in its inventory as of the date of such termination, and to replace and repair any Licensed Product where required to do so by a product warranty; provided, however, that such use, sale, or other disposition shall be subject to the payments provided for in ARTICLE IV of this Agreement.
ARTICLE VII
ASSIGNMENT
This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective successors and assigns. It may not be voluntarily assigned in whole or in part by MEDTRONIC without the prior consent of GREATBATCH, except upon the merger, consolidation or other transfer of all or substantially all of its assets in the power source field. Either party may, however, assign this Agreement to its Subsidiaries without the prior consent of the other, as long as the transferor party remains liable hereunder, and GREATBATCH may freely assign as long as the rights of MEDTRONIC are not adversely affected.
ARTICLE VIII
VALIDITY AND SCOPE
A. Any admission of validity of any Subject Patent that may be implied by the acceptance of any license under any such Patent under this Agreement is limited to the term and scope of such license. MEDTRONIC shall not be estopped by such acceptance form contesting the validity of any Subject Patent in any country before any board or court of competent jurisdiction.
B. Any final decision by a court or administrative board declaring the validity, scope or both, of any claims of one or more of the Subject Patents shall be binding on the parties hereto with respect to any right or obligation under this Agreement arising out of any acts of manufacture, use or sale, under the rights and licenses herein granted occurring subsequent to such final decision in the country where the decision is rendered; however, such a final decision shall not, in and of itself terminate this Agreement. A decision is not final when subject to reversal or modification by appeal or by certiorari.
ARTICLE IX
BANKRUPTCY
GREATBATCH shall have the right to terminate this Agreement on occurrence of either of the following:
1. MEDTRONIC becomes insolvent or makes an assignment for the benefit or creditors;
2. any proceeding is commenced by or against MEDTRONIC under any bankruptcy, reorganization, arrangement, liquidation, readjustment of debt, or moratorium law or statute and such proceeding is not dismissed within 60 days of its institution. ARTICLE X
TERMINATION FOR DEFAULT
In case of the failure of MEDTRONIC to fulfill any of its obligations hereunder, GREATBATCH shall have the right, without limitation of any other right it may have on account of such failure, to terminate this Agreement by giving MEDTRONIC ninety (90) days' written notice of its intention so to do, provided, however, that if MEDTRONIC shall remedy such failure during such ninety (90) day period, then such notice of termination shall be null and void; otherwise, this Agreement shall be considered as terminated on and after the expiration of said ninety (90) day period. ARTICLE XI
VOLUNTARY TERMINATION
MEDTRONIC shall have the unconditional right to terminate forthwith any license herein granted to MEDTRONIC and/or its Subsidiaries under any patent or patents by giving written notice to that effect to GREATBATCH. Such termination shall be effective upon receipt of the notice by GREATBATCH, although GREATBATCH shall have the right to receive payment at the regular dates fixed in ARTICLE V of outstanding royalty amounts. This Agreement shall terminate automatically without notice to either party upon the expiration of the last to expire of the Subject Patents. ARTICLE XII
NOTICES
A. For the purposes of mailing any notice permitted or required by this Agreement, the addresses of the parties here are as follows:
To MEDTRONIC: Medtronic, Inc. 3055 Old Highway Eight P. O. Box 1453 Minneapolis, Minnesota 55440 U. S. A. Attn: Vice-President, Operations
Copy to: Medtronic, Inc. 3055 Old Highway Eight P. O. Box 1453 Minneapolis, Minnesota 55440 Attn: Law Department
To GREATBATCH: Wilson Greatbatch, Ltd. 10,000 Wehrle Drive Clarence, New York 14031
B. All notices required to be given hereunder shall be delivered by hand or shall be sent by telex, telegram or registered mail and deemed to be given on the date that they are deposited in the post office or transmitted by cable or telex.
C. Notices shall be sent to the addresses specified above or to such addresses as the parties may hereafter notify to the other in writing. ARTICLE XIII
CONSTRUCTION
This Agreement shall be construed and interpreted under and in accordance with the laws of the State of Minnesota, United States of America.
ARTICLE XIV
MISCELLANEOUS
A. Nothing in this Agreement shall be construed as granting any right or license to make, use and/or sell any product or apparatus, or practice any method, in any place or in any manner prohibited by law.
B. Except as otherwise expressly provided herein, nothing contained in or pursuant to this Agreement shall be construed as:
1. Granting any license or conferring any right, by implication, estoppel or otherwise, under any technical information, patent application or patent.
2. Granting any sublicensing right, it being understood, of course, that the licence granted herein extends to use and resale of licensed products made and sold hereunder.
3. Imposing any obligation to carry out or forego any action in regard to the filing or prosecution of any patent application, the obtaining of any patent, the maintaining of any patent in force, or the initiation or prosecution of any interference or other contest of priority of invention.
4. Imposing any obligation, or conferring any right, to enforce any patent.
5. Any representation, warranty, assurance, guarantee or inducement whatsoever with respect to quality, production, cost, profit, demand, utility, availability or marketing of any particular product, apparatus, part or material, damage, accidents or injury to persons or property, or infringement or contribution to infringement of patent rights or other rights of third parties, or the changing of any design or specification, or the validity of any Subject Patent.
6. Creating any obligation with respect to technical information furnished by either party to the other except obligations as may arise under the patent laws, unless otherwise agreed to in a separate written document signed by a duly authorized officer.
C. MEDTRONIC agrees to apply an appropriate patent notice to all Licensed Products, and to accept the reasonable suggestions of GREATBATCH with respect thereto.
D. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all previous communications, representations, understandings, and agreements, either oral or written, between the parties or any officials or representatives thereof, with respect to said subject matter. IN WITNESS WHEREOF, GREATBATCH and MEDTRONIC have caused the Agreement to be executed by their duly authorized officers and their corporate seals to be hereunto affixed, as of the day and year first above written.
MEDTRONIC, INC.
By /s/ Norman Dann ------Norman Dann Senior Vice-President
Date: [illegible] 76 ------
Place: [illegible]
WILSON GREATBATCH, LTD.
By: /s/ Wilson Greatbatch PRES ------
Date: 08 MAR 76 ------
Place: Clarence, NY APPENDIX A
PATENT NO. DATE OF ISSUE TITLE ------3,723,183 March 27, 1973 Lithium Battery Enclosure 3,773,557 November 20, 1973 Solid State Battery 3,817,791 June 18, 1974 Lithium Iodine Battery 3,874,929 April 1, 1975 Lithium Iodine Battery 3,895,962 July 22, 1975 Solid State Battery
Exhibit 10.25
July 20, 1976
AMENDMENT OF LICENSE AGREEMENT
WHEREAS, MEDTRONIC, INC., a Minnesota corporation (hereinafter together with its Subsidiaries referred to as MEDTRONIC), and WILSON GREATBATCH LTD., a New York corporation (hereinafter together with its Subsidiaries referred to as GREATBATCH) have heretofore entered into a License Agreement having an effective date of March 16, 1976; and
WHEREAS, MEDTRONIC and GREATBATCH are desirous of eliminating errors in the expressions and language employed in the License Agreement. NOW THEREFORE THE PARTIES AGREE TO THE CHANGES IN THE LICENSE AGREEMENT AS FOLLOWS:
ARTICLE I.A. Line 11, add - in - after "and/or"; and
Line 12, change "and" to - an --.
ARTICLE I.B., Line 7, insert - lithium - before "halide".
ARTICLE I.C., Line 2, change "paument" to - payment--.
ARTICLE IV.A., Line 5, after "for", add - MEDTRONIC or --; and
Line 6, after "Subsidiary," add - (excluding Licensed Products purchased by MEDTRONIC directly or indirectly from GREATBATCH or GREATBATCH's Licensee or designee).
ARTICLE IV.B., the second sentence should be amended to read as follows - From the first day of May each year thereafter that this License Agreement remains in effect, the unit royalty then prevailing for that Medtronic fiscal year shall be the specified unit royalty of paragraph A of this ARTICLE IV increased or decreased as a function of the change over time in the U.S. Department of Labor, Bureau of Labor Statistics, wholesale price index for the output of selected SIC Industries, specifically primary batteries (1972 SIC Code 3692), from that index published for the month of May, 1976. The adjusted unit royalty shall be calculated by multiplying the specified unit royalty by the ratio of the May index of the then current fiscal year to the May, 1976 index. The next more comprehensive wholesale price index inclusive of the Licensed Products shall be substituted for the specified index in the event that publication of the latter is discontinued in the future --.
ARTICLE IV.E., final line, change "or" to - of --.
ARTICLE V.B., Line 6, after "by" add - MEDTRONIC to be determined. MEDTRONIC agrees to submit said records at --.
ARTICLE V.C., Line 5, change "or" (second instance) to - of --;
Line 14, change "or" to - and --; and
Lines 14 and 15, change ", the latter holding excusing" to - on which the escrowed sums are due and to --.
ARTICLE VIII.A., Line 5, change "form" to - from --.
ARTICLE XIV.C., Line 2, change "License" to - Licensed --.
2 IN WITNESS WHEREOF, GREATBATCH and MEDTRONIC have caused the Agreement to be executed by their duly authorized officers and their corporate seals to be hereunto affixed, as of the day and year first above written.
MEDTRONIC, INC.
By [ILLEGIBLE]
Norm Dann, Senior Vice -President of Corporate Development
Date: [ILLEGIBLE] Place: Minneapolis, Minnesota
WILSON GREATBATCH LTD.
By: /s/ WILSON GREATBATCH, PRES. ------Date: January 25, 1977 ------Place: Clarence, New York ------
3 Exhibit 10.26
STOCKHOLDERS AGREEMENT
This STOCKHOLDERS AGREEMENT (this "Agreement") is entered into and effective as of August 23, 1999 among WGL Holdings, Inc., a Delaware corporation (the "Company"), DLJ Merchant Banking Partners II, L.P., a Delaware limited partnership ("DLJ Partners II"), DLJMB Funding II, Inc., a Delaware corporation ("DLJ Funding II"), DLJ Merchant Banking Partners II-A, L.P., a Delaware limited partnership ("DLJ Partners II-A"), DLJ Diversified Partners, L.P., a Delaware limited partnership ("Diversified Partners"), DLJ Diversified Partners-A, L.P., a Delaware limited partnership ("Diversified Partners-A"), DLJ Millennium Partners, L.P., a Delaware limited partnership ("Millennium Partners"), DLJ First ESC L.P., a Delaware limited partnership ("First ESC"), DLJ Offshore Partners II, C.V., a Netherlands Antilles limited partnership ("Offshore Partners II"), DLJ EAB Partners, L.P., a Delaware limited partnership ("EAB Partners"), UK Investment Plan 1997 Partners, a Delaware partnership ("UK Partners"), Fred Hittman (the "Individual Holder"), and each other holder of record of Common Shares (as defined below) who may as a Permitted Individual Holder Transferee (as defined below) hereafter duly and properly execute a separate agreement to be bound by the terms hereof (each DLJ Party (as hereinafter defined), the Individual Holder, and each other Person (as defined below) that hereafter may become a party hereto as contemplated hereby being hereinafter referred to individually as a "Party" and collectively as the "Parties").
RECITALS
1. The Company has authorized 100,000,000 shares of common stock, $.001 par value per share (the "Common Shares").
2. The Individual Holder is a key employee of Greatbatch-Hittman, Inc., a wholly-owned subsidiary of the Company and formerly known as Hittman Materials & Medical Components, Inc. ("HMMC"). The Company purchased HMMC from the Individual Holder and his affiliates in 1998.
3. The Individual Holder has offered to purchase, and the Company has agreed to sell to the Individual Holder, Common Shares of the Company, and the parties hereto are entering into this Agreement in order to define certain rights and obligations of such parties with respect to such Common Shares and related matters.
NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: -2-
AGREEMENT
ARTICLE I
GENERAL PROVISIONS; REPRESENTATIONS AND WARRANTIES
1.1 Certain Terms. In addition to the terms defined elsewhere herein, when used herein the following terms shall have the meanings indicated:
"Adverse Person" means (i) any Persons that are competitors of the Company, directly involved in the business of designing, developing, manufacturing, marketing, selling or distributing of implantable power sources, implantable medical devices, lithium batteries, silver vanadium oxide batteries, and close-tolerance medical and aerospace miniature components intended for commercial distribution, including (without limitation) pacemakers, cardioverter-defibrillators and capacitors for defibrillator applications, (ii) any Persons that are present or former customers of the Company and (iii) any other Persons the Board of Directors reasonably designates as such from time to time.
"Affiliate" means, with respect to any Person, any Person controlling, controlled by, or under common control with such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
With respect to any Common Shares, "beneficial" ownership or "beneficially" owned shall have the same meaning as in Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
"Board of Directors" means the board of directors of the Company.
"Capital Shares" means any and all shares, interests, participations or other equivalents (however designated) of capital shares of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), and any and all warrants, options or other rights to purchase or acquire any of the foregoing.
"Common Share Equivalents" means (without duplication with any other Common Shares or Common Share Equivalents) rights, warrants, options, -3- securities, or exchangeable securities or indebtedness, or other rights, exercisable for or convertible or exhangeable into, directly or indirectly, Common Shares or securities convertible or exchangeable into Common Shares, whether at the time of issuance or upon the passage of time or the occurrence of some future event.
"DLJ" means all of the DLJ Parties, collectively.
"DLJ Party" means any of DLJ Partners II, DLJ Funding II, DLJ Partners II-A, Diversified Partners, Diversified Partners-A, Millennium Partners, First ESC, Offshore Partners II, EAB Partners or UK Partners.
"DLJSC" means Donaldson, Lufkin & Jenrette Securities Corporation or any successor thereto.
"Fair Market Value" means, as of any date, the fair market value of one Common Share as of such date as determined in good faith by the Board of Directors of the Company.
"Fully-Diluted Common Shares" means, at any time, the then outstanding Common Shares of the Company plus (without duplication) all Common Shares issuable, whether at such time or upon the passage of time or the occurrence of future events, upon the exercise, conversion or exchange of all then-outstanding Common Share Equivalents.
"Permitted Individual Holder Transferee" means (i) any trust, limited partnership or other comparable entity established for the benefit of the Individual Holder, the spouse and/or one or more of the lineal descendants of the Individual Holder which is controlled by such Individual Holder, (ii) the spouse, parent, brother, sister and/or one or more of the lineal descendants, step-children, brothers-in-law and/or sisters-in-law of any Individual Holder and (iii) a trust, corporation or foundation organized for charitable purposes.
"Permitted Transferee" means in the case of any DLJ Party, (A) any other DLJ Party, (B) any corporation, partnership or other entity which is an Affiliate of any DLJ Party (collectively, the "DLJ Affiliates"), (C) any managing director, general partner, director, limited partner, officer or employee of any DLJ Party or any DLJ Affiliate, or the heirs, executors, administrators, testamentary trustees, legatees or beneficiaries of any of the foregoing Persons referred to in this clause (C) (collectively, "DLJ Associates"), (D) any trust, the beneficiaries of which, or any corporation, limited partners of which, include only one or more DLJ Parties, DLJ Affiliates, DLJ Associates, their spouses or their lineal descendants and (E) a -4- voting trustee for one or more DLJ Parties or for one or more DLJ Affiliates or DLJ Associates under the terms of a voting trust.
"Person" means any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and any government or agency or political subdivision thereof.
"Qualified IPO" means a consummated initial public offering of Common Shares which is underwritten on a firm commitment basis by a nationally-recognized investment banking firm.
"Registrable Securities" means the Common Shares and any Common Shares which are issuable upon the exercise of any right, including pursuant to any option, warrant or security convertible into Common Shares or similar right and any other securities issued or issuable with respect to such Shares by way of a share dividend or share split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization; PROVIDED, that any Registrable Security will cease to be a Registrable Security when (a) a registration statement covering such Registrable Security has been declared effective by the SEC and it has been disposed of pursuant to such effective registration statement, (b) it is sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met or it is eligible for sale under such Rule 144 without respect to any volume limitations or (c)(i) it has been otherwise transferred and (ii) the Company has delivered a new certificate or other evidence of ownership for it not bearing the legend required pursuant to Section 7.5 of this Agreement and (iii) it may be resold without subsequent registration under the Securities Act.
"SEC" means the Securities and Exchange Commission or any successor governmental agency.
"Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time.
"Selling Holder" means a holder of Registrable Securities who is selling Registrable Securities pursuant to a registration statement under the Securities Act.
"Subsidiary" means (i) any corporation or other entity a majority of the Capital Shares of which having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions is at the time owned, directly or indirectly, with -5- convertible power to vote, by the Company or any direct or indirect Subsidiary of the Company or (ii) a partnership in which the Company or any direct or indirect Subsidiary is a general partner.
"Underwriter" means a securities dealer which purchases any Common Shares as principal and not as part of such dealer's market-making activities.
1.2 Representations and Warranties.
(a) The Individual Holder hereby represents and warrants to the Company and the other Parties that:
(i) it has full power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance by it of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action;
(ii) this Agreement has been duly and validly executed and delivered by such Party and constitutes the binding obligation of such Party enforceable against such Party in accordance with its terms; and
(iii) the execution, delivery and performance by such Party of this Agreement and the consummation by such Party of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, (A) violate any provision of law, statute, rule or regulation to which it is subject, (B) violate any order, judgment, or decree applicable to it or (C) conflict with, or result in a breach or default under, any term or condition of any agreement or other instrument to which such Party is a party or by which such Party is bound.
(b) The Company hereby represents and warrants to each Party that:
(i) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, it has full corporate power and authority under its certificate of incorporation to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance by it of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action;
(ii) this Agreement has been duly and validly executed and delivered by the Company and constitutes the binding obligation thereof enforceable against the Company in accordance with its terms; and -6-
(iii) the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both. (A) violate any provision of law, statute, rule or regulation to which the Company is subject, (B) violate any order, judgment or decree applicable to the Company or (C) conflict with, or result in a breach or default under, any term or condition of its certificate of incorporation or by-laws or any agreement or other instrument to which the Company is a party or by which it is bound.
(c) Each DLJ Party (as to itself only) hereby represents and warrants to the Company and the other Parties that:
(i) it is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, as the case may be, it has full power and authority under its certificate of incorporation or other such organizational document(s) to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance by it of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action;
(ii) this Agreement has been duly and validly executed and delivered by such DLJ Party and constitutes the binding obligation thereof enforceable against such DLJ Party in accordance with its terms; and
(iii) the execution, delivery and performance by such DLJ Party of this Agreement and the consummation by such DLJ Party of the transactions contemplated hereby will not, with or without the giving of notice or the lapse of time, or both, (A) violate any provision of law, statute, or regulation to which such DLJ Party is subject, (B) violate any order, judgment or decree applicable to such DLJ Party or (C) conflict with, or result in a breach or default under, any term or condition of its certificate of incorporation or by-laws (or such other comparable organizational and governing document(s), as the case may be) or any agreement or other instrument to which such DLJ Party is a party or by which it is bound.
ARTICLE II
MANAGEMENT OF THE COMPANY
2.1 Election of Directors Designated by DLJ Partners II. The Individual Holder and each Permitted Individual Holder Transferee (if any) shall take all action within its power, -7- including, but not limited to, the voting of Capital Shares of the Company (to the extent that any such Person holds Capital Shares of the Company entitled to vote thereon), required to cause the Board of Directors to include all of the directors designated by DLJ Partners II, or its successor in interest.
2.2 Replacement of Designated Directors. In the event that any director (a "Withdrawing Director") designated in the manner set forth in Section 2.1 is unable to serve, or once having commenced to serve, is removed or withdraws from the Board of Directors, such Withdrawing Director's replacement (the "Substitute Director") on the Board of Directors (and, if applicable, any executive or similar committee thereof) shall be designated in accordance with Section 2.1. The Company and each of the Parties agrees to take all action within its power, including, but not limited to, (i) the voting of Capital Shares of the Company (to the extent that any such Person holds Capital Shares of the Company entitled to vote thereon) to cause the election of such Substitute Director as soon as practicable following his or her designation and (ii) the instructing of any director it had previously designated to serve as a member of the Board of Directors, as the first order of business at the first meeting thereof after such Substitute Director has been so designated, to vote to seat such designated Substitute Director as a director in place of the Withdrawing Director.
ARTICLE III
TRANSFER OF SECURITIES
3.1 Transfer of Shares. Neither the Individual Holder nor any Permitted Individual Holder Transferee may transfer any Capital Shares of the Company prior to the earlier to occur of (a) a Qualified IPO and (b) the third anniversary of the date of this Agreement (the "Third Anniversary"), except as contemplated by Sections 3.2, 3.3, 3,4, 3.5, 3.8 or 3.9 hereof or pursuant to an offering of equity securities registered under the Securities Act by the Company (except that the Company shall be under no obligation to register any Capital Shares of the Company then held by the Individual Holder or any Permitted Individual Holder Transferee in connection with any such registered offering), except to the extent required under Article IV; provided, however, that in the event the Third Anniversary occurs before a Qualified IPO, no Party that is not a DLJ Party may transfer any Common Shares or Common Share Equivalents to any Adverse Person prior to a Qualified IPO.
3.2 Right of Participation.
(a) If one or more DLJ Parties and/or Permitted Transferees (if any) propose to sell Common Shares or Common Share Equivalents for value (such DLJ Parties -8- and any such Permitted Transferees being referred to herein as a "Transferor") in one transaction or a series of related transactions, but excluding (a) a sale which is pursuant to a Qualified IPO, (b) a sale or sales which are effected by one or more DLJ Parties and/or any Permitted Transferee(s), in a single transaction or series of related transactions, and which do not involve more than 25% of the Fully-Diluted Common Shares and (c) any sale in which all of the Parties agree to participate, then such Transferor shall offer (the "Participation Offer") to include in the proposed sale a number of Common Shares or Common Shares represented by Common Share Equivalents designated by any of the Parties, not to exceed, in respect of any such Party, the number of Common Shares equal to the product of (i) the aggregate number of Common Shares or Common Shares represented by Common Share Equivalents to be sold to the proposed transferee and (ii) a fraction, the numerator of which is equal to the number of Fully-Diluted Common Shares held by such Party and the denominator of which is equal to the number of Fully-Diluted Common Shares. The Transferor shall give written notice to each Party of the Participation Offer (the "Transferor's Notice") at least 20 days prior to the proposed sale. The Transferor's Notice shall specify the proposed transferee, the number of Common Shares or Common Shares represented by Common Share Equivalents and, if applicable, the class or classes of Common Shares to be sold to such transferee, the amount and type of consideration to be received therefor, and the place and date on which the sale is to be consummated. Each Party who wishes to include Common Shares or Common Share Equivalents in the proposed sale in accordance with the terms of this Section 3.2 shall so notify the Transferor not more than 20 days after the date of the Transferor's Notice. The Participation Offer shall be conditioned upon the Transferor's sale of Common Shares or Common Share Equivalents pursuant to the transactions contemplated in the Transferor's Notice with the transferee named therein. If any Party accepts the Participation Offer, the Transferor shall reduce to the extent necessary the number of Common Shares or Common Share Equivalents it otherwise would have sold in the proposed sale so as to permit other Parties who have accepted the Participation Offer to sell the number of Common Shares or Common Share Equivalents that they are entitled to sell under this Section 3.2, and the Transferor and such other Party or Parties shall sell the number of Common Shares or Common Share Equivalents specified in the Participation Offer to the proposed transferee in accordance with the terms of such sale set forth in the Transferor's Notice. Notwithstanding anything in the foregoing to the contrary, no Common Share Equivalents shall receive the benefits of this Section 3.2 prior to the time such Common Share Equivalents are exercisable for or convertible or exchangeable into Common Shares and, in order to obtain the benefits of this Section 3.2, any such Common Share Equivalents in the form of options, warrants or other securities convertible or exchangeable into or exercisable for Common Shares must be exercised or canceled prior to or simultaneously with the consummation of the sale pursuant to this Section 3.2.
(b) The provisions of this Section 3.2 shall terminate upon the consummation of a Qualified IPO. -9-
3.3 Drag-Along Rights.
(a) Notwithstanding any other provision in this Article III, if one or more DLJ Parties (such DLJ Parties being referred to herein as the "Seller") propose to sell fifty percent (50%) or more of the Common Shares and Common Share Equivalents held by DLJ at the time of such sale ("Sale Shares") to a third party or parties which is not an Affiliate of DLJ (a "Third Party") pursuant to a Bona Fide Offer (as defined below), then Seller shall have the right, subject to the provisions of this Section 3.3, to require all other Parties that are not DLJ Parties (collectively, the "Co-Sellers") to include in such sale (a "Required Sale") all of the Common Shares and Common Share Equivalents held by the Co-Sellers (the "Co-Sellers' Shares") by delivering notice (the "Required Sale Notice") to such other Parties.
(b) The Required Sale Notice shall set forth: (i) the date of such notice (the "Notice Date"), (ii) the name and address of the Third Party, (iii) the proposed amount and type of consideration to be paid per Common Shares for the Sale Shares (the "Sale Price"), and the terms and conditions of payment offered by the Third Party in reasonable detail, together with written proposals or agreements, if any, with respect thereto, (iv) the aggregate number of Sale Shares, (v) confirmation that Seller is selling fifty percent (50%) or more of the aggregate number of Fully-Diluted Common Shares then held by DLJ to a Third Party, and (vi) the proposed date of the Required Sale (the "Required Sale Date"), which shall be not less than 30 nor more than 180 days after the Notice Date.
(c) The Co-Sellers shall cooperate in good faith with Seller in connection with consummating the Required Sale (including, without limitation, the giving of consents and the voting of any Common Shares of the Company held by the Co-Sellers to approve such Required Sale). On the Required Sale Date, the Co-Sellers shall deliver, free and clear of all liens, claims or encumbrances, a certificate or certificates and/or other instrument or instruments for all of its Common Shares and Common Share Equivalents, duly endorsed and in proper form for transfer, with the signature guaranteed, to such Third Party in the manner and at the address indicated in the Required Sale Notice and Seller shall cause each Co-Seller's share of the purchase price to be paid to such Co-Seller.
(d) "Bona Fide Offer" shall mean an offer (whether in the form of a purchase of Common Shares, merger, recapitalization, or otherwise) for Common Shares.
(e) In the event of any Required Sale, all Co-Sellers which hold Common Share Equivalents in the form of options, warrants or other securities convertible into or exercisable for Common Shares must exercise or cancel all such options, warrants or conversion or other rights prior to or simultaneously with the consummation of the Required Sale. - 10 -
(f) The provisions of this Section 3.3 shall terminate upon the consummation of a Qualified IPO.
3.4 Right of First Refusal.
(a) If the Individual Holder and each Permitted Individual Holder Transferee shall have received, after the Third Anniversary and before a Qualified IPO, a bona fide offer from a third party ("Third Party Offerer") to purchase all and not less than all of the Common Shares and Common Share Equivalents of the Company then beneficially owned by the Individual Holder and each such Permitted Individual Holder Transferee (the "ROFR Shares") and they desire to transfer the ROFR Shares to the Third Party Offeror, then the Individual Holder and each such Permitted Individual Holder Transferee shall first offer to sell all of their ROFR Shares to the Company and DLJ Partners II, or its successor in interest, at the same purchase price and on the same terms and conditions as are set forth in the offer of the Third Party Offeror. For purposes of this Section 3.4, the term "Offerees" shall mean (i) DLJ Partners II (or its successors in interest) and (ii) the Company. The offer to the Offerees shall be in writing and shall have a complete executed copy of the offer from the Third Party Offeror attached thereto. The offer shall continue in effect during the option periods provided for in Section 3.4(b) hereof (the "Option Periods"), during which Option Periods the ROFR Shares shall not be transferred to any Person except the Offerees. The offer may be accepted by one or more of the Offerees in whole or but not in part.
(b)(i) In the event the Offerees receive a written offer to purchase pursuant to Section 3.4(a) above, the Company shall initially have thirty (30) days ("First Option Period") to elect to purchase all or any part of the ROFR Shares subject to such offer.
(ii) If the Company does not elect to purchase all of the ROFR Shares prior to the expiration of the First Option Period, then DLJ Partners II (or its successor in interest) shall have thirty (30) days ("Second Option Period") to elect to purchase all or any part of the ROFR Shares that the Company does not elect to purchase during the First Option Period. DLJ Partners II may assign its option to purchase ROFR Shares under this Section 3.4 one or more of the other DLJ Parties.
(iii) Election by an Offeree to purchase ROFR Shares pursuant to this Section 3.4 shall be effected by sending written notice of such election to the Individual Holder and the Company prior to the expiration of the applicable Option Period. The closing of any purchase and sale of ROFR Shares hereunder shall take place at the office of the Company within ten (10) business days after the date of the notice of election to purchase. - 11 -
(iv) If the Company and or DLJ Partners II does not elect to purchase all of the ROFR Shares as provided for in this Section 3.4, then the Individual Holder and each Permitted Individual Holder Transferee shall have the right, for a period of 90 days after the expiration of the Option Periods, to transfer all of the ROFR Shares to the Third Party Offeror. If such transfer to the Third Party Offeror does not take place within such 90-day period, then the ROFR Shares shall remain subject to all of the terms and conditions of this Agreement.
(c) The provisions of this Section 3.4 shall terminate upon the consummation of a Qualified IPO.
3.5 Company Call Option.
(a) In the event that the Individual Holder violates any noncompete or confidentiality obligation owed by the Individual Holder to the Company (or any of its Affiliates) under any contract or pursuant to applicable law, then the Company shall have the option to acquire any or all Common Shares and any or all Common Share Equivalents beneficially owned by the Individual Holder and the Permitted Individual Holder Transferees at a price per share for such Common Shares or Common Share Equivalents equal to the lesser of the price originally paid by such Person to acquire such Common Shares and/or Common Share Equivalents and the Fair Market Value thereof.
(b) In the event that the Company elects to exercise the option granted pursuant to this Section 3.5 to acquire the Common Shares and/or any Common Share Equivalents beneficially owned by the Individual Holder and/or Permitted Individual Holder Transferees, the Company shall pay the purchase price for such Common Shares and/or Common Share Equivalents in cash, up to an aggregate purchase price for such purchases of $750,000; and the Company shall make any additional payments required under this Section 3.5 by delivery of a promissory note, which shall be subordinated to all debt of the Company, bearing interest at 7% per annum (which interest may be payable by delivery of notes of like tenor in principal amount equal to the interest then due) with a maturity one year beyond the maturity of Company's subordinated debt at the close of business on the date of this Agreement.
3.6 Prohibited Transfers. Any purported transfer of Common Shares and/or Common Share Equivalents by a Party which is not permitted by the provisions of Section 3.1, 3.2, 3.3 or 3.4, or which is in violation of such provisions, or which is not a transfer to a Permitted Individual Holder Transferee pursuant to Section 3.9 shall be void and of no force and effect whatsoever. - 12 -
3.7 Certain Events Not Deemed Transfers. Except as contemplated by Section 3.3, in no event shall any of the following constitute a transfer of Common Shares for purposes of Section 3.1, 3.2, 3.3 or 3.4 or be subject to the terms hereof: (a) an exchange, reclassification or other conversion of Common Shares into any cash, securities or other property pursuant to a merger, consolidation or recapitalization of the Company or any Subsidiary with, or a sale or transfer by the Company or any Subsidiary of all or substantially all its assets to, any Person or (b) a conversion of outstanding Common Share Equivalents into Common Shares in accordance with the terms thereof.
3.8 Transfers Subject to Compliance with Securities Act. No Common Shares may be transferred by the Individual Holder or any Permitted Individual Holder Transferee (other than pursuant to an effective registration statement under the Securities Act) unless such Party first delivers to the Company an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Company, to the effect that such transfer is not required to be registered under the Securities Act.
3.9 Permitted Transferees.
Notwithstanding anything in this Agreement to the contrary, the Individual Holder and any Permitted Individual Holder Transferee may, without the consent of the Company or any of the Parties and without compliance with Section 3.1, 3.2, 3.3 or 3.4, at any time transfer any or all of its Common Shares and Common Share Equivalents to one or more Permitted Individual Holder Transferees, so long as the transfer to such Person is not in violation of applicable federal or state securities laws, and such Person(s), by accepting such Common Shares and/or Common Share Equivalents, shall be deemed to have agreed to be bound by the terms of this Agreement (on the same terms as the Individual Holder). In the event that the Individual Holder or any Permitted Individual Holder Transferee transfers any Common Shares and/or Common Share Equivalents to any transferee other than a Permitted Individual Holder Transferee or any Person which is a Party to this Agreement, if such transfer was permitted under the terms of this Agreement, such Common Shares and/or Common Share Equivalents, as the case may be, shall thereafter be free from the restrictions set forth in this Agreement and no longer subject thereto and such transferee shall have no rights hereunder, and the definition of Party hereunder shall not include such transferee.
ARTICLE IV
PIGGY-BACK REGISTRATION
4.1 Notice; Piggyback Registration. Subject to the provisions of this Agreement, if the Company proposes to file a registration statement under the Securities Act with respect to - 13 - an offering of any equity securities by the Company for its own account or for the account of any of its equity holders (other than a registration statement on Form S-4 or Form S-8, or any substitute form that may be adopted by the SEC, or any registration statement filed in connection with an exchange offer or offering of securities solely to the Company's existing security holders), then the Company shall give written notice of such proposed filing to the Parties (including any Permitted Individual Holder Transferees) as soon as practicable (but in no event less than 30 days before the anticipated effective date of such registration statement), and such notice shall offer such Persons the opportunity to register such number of Registrable Securities as each such Person may request (a "Piggyback Registration"). Subject to Sections 4.2, 4.3, 4.4, 4.5 and 4.6 hereof, the Company shall include in each such Piggyback Registration all Registrable Securities requested to be included in the registration for such offering. Each such holder of Registrable Securities shall be permitted to withdraw all or part of such holder's Registrable Securities from a Piggyback Registration at any time prior to the effective date thereof.
4.2 Selection of Underwriters. DLJ Partners II shall, for a period of thirty (30) days after the receipt by DLJ Partners II of Notice of a Piggyback Registration, have the right, but not the obligation, to designate, in its sole and absolute discretion, the book-running managing Underwriter with respect to the Piggyback Registration or any other underwritten public offering of Registrable Securities or other securities of the Company (the "Managing Underwriter") and shall, in consultation with the Company, select such additional Underwriters to be used in connection with the offering, if any, unless, at the time the Company takes the necessary corporate action to approve the filing of the registration statement, DLJ and Permitted Transferees collectively do not beneficially own at least five percent (5%) of the Fully-Diluted Common Shares. In the event that DLJ Partners II exercises such right by notifying the Company thereof, DLJ Partners II shall select, upon consultation with the Company, one or more co-managers for each such offering if DLJ Partners II, in its sole discretion, shall determine that any be necessary, and the underwriting fees related to any such offering shall be allocated among any such co-managers in such proportions as DLJ Partners II shall determine. The Managing Underwriter's compensation for such services will be at market rates subject to the type and size of the offering. In the event of any such offering, the Managing Underwriter and the Company will enter into an agreement appropriate to the circumstances, containing provisions for, among other things, compensation, indemnification, contribution, and representations and warranties, which are usual and customary for similar agreements entered into by the Managing Underwriter or other investment bankers of national standing acting in similar transactions. The Managing Underwriter shall have no obligation to act as underwriter or dealer-manager to the Company or to purchase any securities of the Company, except to the extent that such obligations arise out of an underwriting agreement or dealer-manager agreement, as the case may be, with respect to a particular offering executed and delivered by both the Managing Underwriter and the Company. In the event that DLJ and Permitted Transferees collectively do not beneficially - 14 - own at least five percent (5%) of the Fully-Diluted Common Shares at the time the Company takes the necessary corporate action to approve the filing of the registration statement, or DLJ Partners II does not exercise such right within such thirty (30) day period by notifying the Company thereof, the Company shall select the book-running managing Underwriter and such additional Underwriters to be used in connection with the offering.
4.3 Underwriters' Cut-Backs. The Company shall use all commercially reasonable efforts to cause the Managing Underwriter or any other managing Underwriter of a proposed underwritten offering, as the case may be, to permit the Registrable Securities requested to be included in the registration statement for such offering under Section 4.1 or pursuant to other piggyback registration rights, if any, granted by the Company ("Piggyback Securities") to be included on the same terms and conditions as any similar securities included therein. Notwithstanding the foregoing, the Company shall not be required to include any Party's Piggyback Securities in such offering unless such Party accepts the terms of the underwriting agreement between the Company and the Managing Underwriter (or other managing Underwriter) or Underwriters, and otherwise complies with the provisions of Section 4.4 below. If the managing Underwriter or Underwriters of a proposed underwritten offering advise the Company in writing that in their opinion the total amount of securities, including Piggyback Securities, to be included in such offering is sufficiently large to potentially impede or interfere with the offering, then in such event the securities to be included in such offering shall be allocated first to the Company and then, to the extent that any additional securities can, in the opinion of such managing Underwriter or Underwriters, be sold without any such potential to impede or interfere with the offering, pro rata among the holders of Piggyback Securities on the basis of the number of Registrable Securities requested to be included in such registration by each such holder.
4.4 Participation. No Party may participate in any underwritten registration under this Article IV unless such Party (a) agrees to sell such Party's Registrable Securities on the basis provided in any underwriting arrangements approved by the Person entitled hereunder to approve such arrangements, (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and this Agreement and (c) if requested by another Person participating in such underwritten registration, provides that all securities convertible or exchangeable into Common Shares that are included in such underwritten registration shall be so converted or exchanged on or prior to the consummation thereof.
4.5 Termination by the Company. Notwithstanding anything herein to the contrary, at any time prior to the effectiveness of any registration statement filed pursuant hereto, the Company shall have the right, in its sole and absolute discretion, not to proceed with the registration of any securities pursuant to such registration statement and, in the event that the Company exercises such right, no holder of Registrable Securities shall have any right to - 15 - require the Company to register any such Registrable Securities except in accordance with the express provisions of this Agreement.
4.6 Lock-Up Letters. Each holder of Registrable Securities (whether or not such Registrable Securities are included in a registration statement pursuant hereto) agrees to execute a written agreement not to effect any public sale or distribution of the issue being registered or of any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 under the Securities Act, during the 14 days prior to, and during the 180-day period beginning on the effective date of a registration statement filed pursuant hereto except as part of such registration if and to the extent requested by the Company in the case of a non-underwritten public offering or if and to the extent requested by the Managing Underwriter or managing Underwriter or Underwriters as case may be, in the case of an underwritten public offering.
ARTICLE V
REGISTRATION PROCEDURES
5.1 Procedures.
(a) The Company may require each Selling Holder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as it may from time to time reasonably request and such other information as may be legally required in connection with any registration. Notwithstanding anything herein to the contrary, the Company shall have the right to exclude from any offering the Registrable Securities of any Selling Holder who does not comply with the provisions of the immediately preceding sentence.
(b) Each Selling Holder agrees that, (i) upon receipt of any notice from the Company of the happening of any event which makes any statement made in a registration statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in such registration statement, prospectus or documents so that, in the case of the registration statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) such Selling Holder will forthwith discontinue disposition of Registrable - 16 -
Securities pursuant to the registration statement covering such Registrable Securities until such Selling Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.1(b)(i) hereof, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies, then in such Selling Holder's possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice pursuant to Section 5.1(b)(i) hereof to the date when the Company shall make available to the Selling Holders of Registrable Securities covered by such registration statement a prospectus supplemented or amended to conform with the requirements of Section 5.1(b)(i) hereof.
5.2 Registration Expenses. In connection with any registration statement required to be filed hereunder, the Company shall pay the following registration expenses (the "Registration Expenses"): (a) all registration and filing fees (including, without limitation, with respect to filings to be made with the National Association of Securities Dealers, Inc.), (b) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (c) printing expenses, (d) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), (e) the fees and expenses incurred in connection with the listing on an exchange of the Registrable Securities if the Company shall choose to list such Registrable Securities, (f) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company, (g) the fees and expenses of any special experts retained by the Company in connection with such registration, and (h) fees and expenses of any "qualified independent underwriter" or other independent appraiser participating in an offering pursuant to Rule 2720(c) of the National Association of Securities Dealers, Inc. The Company shall not have any obligation to pay any underwriting fees, discounts, or commissions attributable to the sale of Registrable Securities or, except as provided by clause (b) or (h) above, any out-of-pocket expenses of the Selling Holders (or the agents who manage their accounts) or the fees and disbursements of counsel for any Underwriter.
5.3 Deferral. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be obligated to prepare and file, or cause to become effective, any registration statement pursuant to this Agreement at any time when, in the good faith judgment of the Board of Directors, the filing thereof at the time requested or the effectiveness thereof after filing should be delayed to permit the Company to include in the registration statement the financial statements of the Company (and any required audit opinion thereon) for the then immediately preceding fiscal year or fiscal quarter, as the case may be. - 17 -
The filing of a registration statement by the Company cannot be deferred pursuant to the provisions of the immediately preceding sentence beyond the time that such financial statements (or any required audit opinion thereon) would be required to be filed with the SEC as part of the Company's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, if the Company were then obligated to file such reports. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be obligated to cause a registration statement previously filed pursuant hereto to become effective, and may suspend sales by the Parties of Registrable Securities under any registration that has previously become effective, at any time when, in the good faith judgment of the Board of Directors, it reasonably believes that the effectiveness of such registration statement or the offering of securities pursuant thereto would materially adversely affect a pending or proposed acquisition, merger, recapitalization, consolidation, reorganization or similar transaction or negotiations, discussions or pending proposals with respect thereto; provided that deferrals pursuant to this sentence shall not exceed, in the aggregate, 120 days in any calendar year. The filing of a registration statement, or any amendment or supplement thereto by the Company cannot be deferred, and the rights of holders of Registrable Securities to make sales pursuant to an effective registration statement cannot be suspended, pursuant to the provisions of the immediately preceding sentence, for more than 15 days after the abandonment or consummation of any of the foregoing proposals or transactions or, in any event, for more than 30 days after the date of the determination of the Board of Directors pursuant to the immediately preceding sentence of this Section 5.3.
ARTICLE VI
TERMINATION
6.1 Termination. This Agreement shall terminate upon the earlier of (i) the dissolution, liquidation or winding-up of the Company or (ii) the date on which DLJ and all Permitted Transferees collectively are no longer the beneficial owner of at least five percent (5%) of the Fully- Diluted Common Shares. A Person who ceases to hold any Common Shares or Common Share Equivalents and who ceases to beneficially own any Common Shares or Common Share Equivalents shall cease to be a Party and shall have no further rights or obligations under this Agreement. - 18 -
ARTICLE VII
MISCELLANEOUS
7.1 Amendment. Any provision of this Agreement may be altered, supplemented, amended, or waived only by the written consent of each of (i) the Company and (ii) all of the Parties, except that any Party may unilaterally waive any of its rights hereunder so long as such waiver is in writing.
7.2 Specific Performance. The Parties and the Company recognize that the obligations imposed on them in this Agreement are special, unique, and of extraordinary character, and that in the event of breach by any party, damages will be an insufficient remedy; consequently, it is agreed that the Parties and the Company may have specific performance and injunctive relief (in addition to damages) as a remedy for the enforcement hereof, without proving damages.
7.3 Assignment. Except as otherwise expressly provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective succcssors and assigns of the Parties and the Company. No such assignment shall relieve the assignor from any liability hereunder. Any purported assignment made in violation of this Section 7.3 shall be void and of no force and effect.
7.4 Shares Subject to this Agreement. All Common Shares and Common Share Equivalents now owned or hereafter acquired by any of the Parties shall be subject to, and entitled to the benefits of, the terms of this Agreement.
7.5 Legends.
(a) Each certificate for Common Shares and Common Share Equivalents held by any Person a party hereto shall include a legend in substantially the following form:
THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON TRANSFER, AND OTHER TERMS AND CONDITIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT, DATED AS OF ______, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH MAY BE - 19 -
OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
(b) A restriction on transfer of Common Shares set forth in such legend (a "Restriction") shall cease and terminate as to any particular Common Shares when, in the opinion of the Company and counsel reasonably satisfactory to the Company (which opinion shall be delivered to the Company in writing), such Restriction is no longer required. Whenever such Restriction shall cease and terminate as to any Common Shares, the holder thereof shall be entitled to receive from the Company, without expense to such holder, new certificate(s) not bearing a legend stating such Restriction.
7.6 Notices. Any and all notices, designations, consents, offers, acceptances or other communications provided for herein (each a "Notice") shall be given in writing by overnight courier, telegram or telescope which shall be addressed, or sent, to the respective addresses as follows (or such other address as the Company or any Party may specify to the Company and all other Parties by Notice):
The Company:
WGL Holdings, Inc. 10,000 Wehrle Drive Clarence, New York 14031 Attention: President Telecopy No.: (716) 759-5527
DLJ Parties:
DLJ Partners II DLJ Merchant Banking Partners II, L.P. 277 Park Avenue New York, New York 10172 Attention: Nicole Arnaboldi/Ivy Dodes Telecopy No.: (212) 892-7272
DLJ Funding II DLJMB Funding II, Inc. 277 Park Avenue New York, New York 10172 Attention: Nicole Arnaboldi/Ivy Dodes Telecopy No.: (212) 892 -7272 - 20 -
DLJ Partners II-A DLJ Merchant Banking Partners II-A, L.P. 277 Park Avenue New York, New York 10172 Attention: Nicole Arnaboldi/Ivy Dodes Telecopy No.: (212) 892-7272
Diversified Partners DLJ Diversified Partners, L.P. 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes/Nicole Arnaboldi Telecopy No.: (212) 892-7272
Diversified Partners-A DLJ Diversified Partners-A, L.P. 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes/Nicole Arnaboldi Telecopy No.: (212) 892-7272
Millennium Partners DLJ Millennium Partners, L.P. c/o DLJ Merchant Banking II, Inc. 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes/Nicole Arnaboldi Telecopy No.: (212) 892-7272
First ESC DLJ First ESC L.P. c/o DLJ LBO Plans Management Corporation 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes/Nicole Arnaboldi Telecopy No.: (212) 892 -7272 - 21 -
Offshore Partners II DLJ Offshore Partners II, C.V. c/o DLJ Offshore Management N.V. John B. Gorsiraweg 14 Willemstad, Curacao Netherlands, Antilles Telecopy No.: 011-59-99-614-129
EAB Partners DLJ EAB Partners, L.P. c/o DLJ LBO Plans Management Corporation 277 Park Avenue New York, New York 10172 Attention: Ivy Dodes/Nicole Arnaboldi Telecopy No.: (212) 892-7272
UK Partners UK Investment Plan 1997 Partners 2121 Avenue of the Stars Fox Plaza, Suite 3000 Los Angeles, CA 90067 Attention: Osamu Watanabe Telecopy No.: (310) 282-6178 in each case with a copy to:
Steven D. Rubin, Esq. Well, Gotshal & Manges LLP 700 Louisiana, Suite 1600 Houston, Texas 77002 Telecopy No.: (713) 224-9511
To the Individual Holder or any Permitted Individual Holder Transferee:
To such address or telescope number of such Party as is set forth on Schedule I hereto or as such Party provides by Notice to the Company and all other Parties or, if such address is not so provided, to such Party's address as is reflected on the stock transfer records of the Company at such time. - 22 -
All Notices shall be deemed effective and received (a) if given by telescope, when such telescope is transmitted to the telescope number specified above and receipt thereof is confirmed; (b) if given by overnight courier, on the business day immediately following the day on which such Notice is delivered to a reputable overnight courier service; or (c) if given by telegram, when such Notice is delivered at the address specified above. No Party shall be entitled to receive a Notice hereunder (or a copy of a Notice delivered to the Company) if, at the time such Notice is to be sent, such Party (including its Affiliates and the employees of such Party and its Affiliates) no longer owns any Common Shares.
7.7 Confidentiality. The Parties shall, and shall cause their respective officers, directors, employees and agents and the respective subsidiaries and Affiliates of the Parties and their respective officers, directors, employees and agents to, hold confidential and not use in any manner detrimental to the Company or any of its Subsidiaries all information they may have or obtain concerning the Company or any of its Subsidiaries and their respective assets, business, operations or prospects ("Confidential Information"); provided, however, that the foregoing shall not apply to (a) information that is or becomes generally available to the public other than as a result of a disclosure by a Party or any of its employees, agents, accountants, legal counsel or other representatives, (b) information that is or becomes available to a Party or any of its employees, agents, accountants, legal counsel or other representatives on a nonconfidential basis prior to its disclosure by the Company or its employees, agents, accountants, legal counsel or other representatives, and (c) information that is required to be disclosed by a Party or any of its employees, agents, accountants, legal counsel or other representatives as a result of any applicable law, rule or regulation of any governmental authority or stock exchange. If any Party desires to sell Common Shares and in connection with such potential sale desires to disclose information regarding the Company to the potential purchaser in such sale which it is not permitted to disclose pursuant to the preceding sentence, such Party shall notify the Company of such Party's desire to disclose such information and shall identify the potential purchaser in such notification. The Company may require any such potential purchaser of Common Shares to enter into a confidentiality agreement with respect to Confidential Information on customary terms used in confidentiality agreements in connection with corporate acquisitions.
7.8 Exclusive Financial Advisor and Investment Banking Advisor. During the five-year period beginning on the date hereof, DLJSC, or any Affiliate of DLJSC that DLJ Partners II or DLJSC may choose, in their sole and absolute discretion, shall be engaged as the exclusive financial and investment banking advisor for the Company and its subsidiaries pursuant to the terms of an agreement substantially in the form of the agreement attached hereto as Exhibit A hereto. - 23 -
7.9 Counterparts. This Agreement may be executed in two or more counterparts and each counterpart shall be deemed to be an original and all such counterparts together shall constitute one and the same agreement of the parties hereto.
7.10 Section Headings. Headings contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of this Agreement or any provisions hereof.
7.11 Choice of Law. This Agreement, including, without limitation, the interpretation, construction, validity and enforceability thereof, shall be governed by the internal laws of the State of New York including Section 5-1401 of the General Obligations Law of the State of New York without regard to the principles of conflict of laws thereof.
7.12 Entire Agreement. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior agreements, discussions and understandings with respect thereto.
7.13 Cumulative Rights. The rights of the Parties and the Company under this Agreement are cumulative and in addition to all similar and other rights of the parties under other agreements.
7.14 Severability. If any term, provision, covenant, or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
7.15 Submission to Jurisdiction. (a) Any legal action or proceeding with respect to this Agreement, the Common Shares or any document relaxed thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Company and each Party hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions.
(b) The Company and each Party irrevocably consent to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Company or such Party, respectively, at its address provided herein or on Schedule I, as the case may be. - 24 -
(c) Nothing contained in this Section 7.15 shall affect the right of any party hereto to serve process in any other manner permitted by law.
7.16 Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Agreement, any Common Shares or any course of conduct, course of dealing, verbal or written statement or action of any party hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first above written.
WGL HOLDINGS, INC.
By: /s/ Edward F. Voboril ------Edward F. Voboril President and Chief Executive Officer
DLJ MERCHANT BANKING PARTNERS II, L.P.
By: DLJ MERCHANT BANKING II, INC. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJMB FUNDING II, INC.
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
-25-
DLJ MERCHANT BANKING PARTNERS II-A, L.P.
By: DLJ MERCHANT BANKING II, INC. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ Diversified Partners, Inc. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJ DIVERSIFIED PARTNERS-A, L.P.
By: DLJ Diversified Partners. Inc. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
- 26 -
DLJ MILLENIUM PARTNERS, L.P.
By: DLJ Merchant Banking II, Inc. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJ FIRST ESC L.P.
By: DLJ LBO Plans Management Corporation
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJ OFFSHORE PARTNERS II, C.V.
By: DLJ Merchant Banking II, Inc. Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
DLJ EAB PARTNERS, L.P.
By: DLJ LBO Plans Management Corporation Managing General Partner
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
- 27 -
UK INVESTMENT PLAN 1997 PARTNERS
By: UK INVESTMENT PLAN 1997, INC.
By: /s/ IVY DODES ------Name: IVY DODES ------Title: Vice President ------
Fred Hittman
/s/ Fred Hittman ------
SCHEDULE I
Fred Hittman 3211 Keyser Road Baltimore, Maryland 21208
Telecopy No.: 410 -484 -6498 EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Wilson Greatbatch Technologies, Inc. on Amendment No. 1 to Form S-1 of our report dated January 21, 2000 (March 14, 2000 as to Note 18 and May 18, 2000 as to the effects of the reverse stock split described in Note 1), appearing in the Prospectus, which is part of this Registration Statement, and of our report dated January 21, 2000 (March 14, 2000 as to Note 18 and May 18, 2000 as to the effects of the reverse stock split described in Note 1) relating to the financial statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Buffalo, New York July 3, 2000 EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated September 22, 1998, accompanying the financial statements of Hittman Materials and Medical Components, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned reports in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
Baltimore, Maryland July 3, 2000
End of Filing
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